An empirical investigation of the forward interest rate term structure
In this paper we study empirically the Forward Rate Curve (FRC) of 5 different currencies.
We confirm and extend the findings of our previous investigation of the U.S. Forward Rate Curve.
In particular, the average FRC follows a square-root law, with a prefactor related to the spot volatility, suggesting a Value-at-Risk like pricing.
We find a striking correlation between the instantaneous FRC and the past spot trend over a certain time horizon, in agreement with the idea of an extrapolated trend effect.
We present a model which can be adequately calibrated to account for these effects.