Do Price Jumps Matter in Volatility Forecasts of US Treasury Futures?

Abstract

This study investigates volatility forecasts in the US Treasury futures market and emphasizes the importance of price jumps across various maturities under moderate and sharp interest rate rising scenarios. We assess out-of-sample forecasting performance not only with statistical method but economic method based on a volatility timing strategy. Our findings indicate that models including price jumps specifications exhibit substantial enhancements in both evaluation methods over the entire out-of-sample period, particular for the period of sharp interest rate rising. Our results are robust to nonparametric jump tests used in this study, transaction costs, and portfolio rebalancing method.