Calculating tail risk in Fixed Income markets

In this study, the researchers from the Cheung Kong Graduate School of business constructed a model-free measure of tail risk for Fixed income markets using a proprietary dataset of swaptions, denoted as TAIL, which captures the price of insuring against extreme movements in interest rate swap rates.

The researchers show that TAIL closely tracks the variations in tail risk in the economy and has strong predictive power for returns on Treasury bonds, corporate bonds, mortgage-backed securities, Fixed-income hedge funds, and even equities, suggesting that interest rate tail risk is universally priced in all major Finanancial markets.

Read the full study here