
We investigate whether the same finite dimensional dynamic system spans both interest rates (the yield curve) and interest rate options (the implied volatility surface). We find that the options market exhibits factors independent of the underlying yield curve. While three common factors are adequate to capture the systematic movement of the yield curve, we need three additional factors to capture the movement of the implied volatility surface.
Factors; principal component; LIBOR; swaps; swaptions; yield curve; implied volatility surface., jel: jel:E43, jel: jel:G12
Factors; principal component; LIBOR; swaps; swaptions; yield curve; implied volatility surface., jel: jel:E43, jel: jel:G12
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