A tale of two tails

Jungkyu Ahn; Doowon Lee

doi:10.1016/j.econlet.2025.112729

A tale of two tails

Jungkyu Ahn
, Doowon Lee^*

^*Corresponding author for this work

Department of Business Administration

The University of Sydney

Research output: Contribution to journal › Journal article › peer-review

Abstract

This paper investigates the empirical properties of two-sided tail risks in the fixed income market. Conditional skewness embedded in interest rate derivatives, particularly swap rates, varies systematically. We analyze the dynamics of tail risks in swaptions, while extracting right- and left-hand side tail measures across various expiries and underlying swap maturities. We find that these tail risks respond asymmetrically to uncertainty measures. Specifically, fiscal and sovereign debt-related uncertainties (monetary and trade policy uncertainties) are positively (negatively) associated with excess tail risk.

Original language	English
Article number	112729
Journal	Economics Letters
Volume	258
DOIs	https://doi.org/10.1016/j.econlet.2025.112729
State	Published - 2026.01

Keywords

Interest rate options
Tails
Uncertainty

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10.1016/j.econlet.2025.112729

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title = "A tale of two tails",

abstract = "This paper investigates the empirical properties of two-sided tail risks in the fixed income market. Conditional skewness embedded in interest rate derivatives, particularly swap rates, varies systematically. We analyze the dynamics of tail risks in swaptions, while extracting right- and left-hand side tail measures across various expiries and underlying swap maturities. We find that these tail risks respond asymmetrically to uncertainty measures. Specifically, fiscal and sovereign debt-related uncertainties (monetary and trade policy uncertainties) are positively (negatively) associated with excess tail risk.",

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AB - This paper investigates the empirical properties of two-sided tail risks in the fixed income market. Conditional skewness embedded in interest rate derivatives, particularly swap rates, varies systematically. We analyze the dynamics of tail risks in swaptions, while extracting right- and left-hand side tail measures across various expiries and underlying swap maturities. We find that these tail risks respond asymmetrically to uncertainty measures. Specifically, fiscal and sovereign debt-related uncertainties (monetary and trade policy uncertainties) are positively (negatively) associated with excess tail risk.

KW - Interest rate options

KW - Tails

KW - Uncertainty

UR - https://www.scopus.com/pages/publications/105022435260

U2 - 10.1016/j.econlet.2025.112729

DO - 10.1016/j.econlet.2025.112729

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SN - 0165-1765

VL - 258

JO - Economics Letters

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ER -

A tale of two tails

Abstract

Keywords

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