Model Insights: Constructing a term structure of unconditional interest rate volatility
Document ID: 2009-1272
Published on: 22nd January 2009
Author: Steffen Sorensen
Risk managers need to make assumptions about volatility in interest rate models used for valuing assets and liabilities. An insurance company, for example, is likely to have liabilities which fall due well beyond 50 years and will need to make assumptions about uncertainty this far in the future. How do we estimate the unconditional volatility of forward ‘default-free’ interest rates?
