This study utilizes data from the US options market and constructs a VIX-style measure of forward-looking volatility about Treasury yields to capture uncertainty about interest rates. Using the structural VAR model, we show that increases in uncertainty about interest rates predict the slowing of future activity. Greater expected volatility in interest rates predicts declines in industrial production, retail trade, consumer and producer prices, and increased unemployment. These results also remain robust when decomposing the VIX-style measure into two parts: volatility calculated using out-of-the-money put options and volatility calculated from out-of-the-money call options. Finally, uncertainty about 7 to 10-year Treasuries is more informative about the future of the economy than uncertainty about 20-year yields.
Bibliographical notePublisher Copyright:
- Implied volatility
- Treasury futures and options
ASJC Scopus subject areas
- Economics and Econometrics