Tail Risk in Fixed-Income Markets

The importance of tail risk for asset pricing has been widely recognized in the literature, but its empirical investigations rest in equity markets mostly. We construct a model-free measure of tail risk for \u85xed-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. We 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, \u85 xed-income hedge funds, and even equities, suggesting that interest rate tail risk is universally priced in all major \u85nancial markets. We also \u85nd strong links between TAIL and fundamental economic variables