Discussion Paper

Drivers of Option-Implied Interest Rate Volatility

Abstract: Option-implied volatilities of U.S. short-term interest rates have risen sharply since late 2021, reaching their highest levels in over a decade. Although these measures declined moderately since early 2023, they remain at around the 70th percentile of their historical distribution. This note links the implied volatility of short-term interest rates to macroeconomic uncertainty and highlights two fundamental drivers of short-term interest rate volatility over the past 30 years: inflation uncertainty and growth uncertainty.

https://doi.org/10.17016/2380-7172.3572

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: FEDS Notes

Publication Date: 2024-10-24

Number: 2024-10-24