The effect of interest rate volatility on treasury yields

There is a substantial literature on the level and volatility of interest rates. However, there is no agreement to date on the relationship between the two, e.g., whether higher interest rate volatility will result in higher or lower bond yields. Further, there is virtually no research on the role of maturity in this relationship. It is hypothesized that, because of the stochastic nature of interest rates and the embedded option associated with …