Model Insights - Constructing a term structure of unconditional interest rate volatility
Last updated 19th March 2009 - Read this latest Insights report authored by 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?