Does Implied Volatility Imply Volatility—in Bonds?

Abstract

The authors investigate the relationship between the implied volatility derived from option contracts on U.S. Treasury bond futures and the actual volatility observed in these securities. Research has suggested that implied volatility in stock options correctly forecasts realized volatility in stock prices; the authors find the same is true in bonds. Evidence on implied volatility in 25 options written on futures contracts on U.S. Treasury long bonds over 1993–1999 indicates a statistically significant relationship between implied and realized volatility. Further, implied volatility predicts realized volatility in an unbiased fashion.