Volatility patterns of short-term interest rate futures

Abstract

A general question in finance is whether the volatility of the price of futures contracts follows any particular trend over the contract’s life. In this study, we contribute to the debate by empirically analyzing the trend of the term structure of the volatility of short-term interest rates (STIR) futures prices. Using data on the Eurodollar, Euribor, and Short-Sterling futures contracts for the period between 2000 and 2018, we model the volatility of each individual contract considering time to expiration and trading activities. Furthermore, we investigate whether these trends change according to overall economic conditions. We find that STIR futures behave differently than futures on other underlying assets and that, most of the time, STIR futures price volatility declines as the contract approaches expiration. Moreover, the relation between volatility and time to maturity depends on market conditions and trading activities, and it is non-linearly related to the observation period.