Search results for "yield curve"
showing 10 items of 10 documents
Economic policy uncertainty effects for forecasting future real economic activity
2018
Recently introduced measures for Economic Policy Uncertainty (EPU) included in the data from 1997 - 2016 have a role in forecasting out-of-sample values for the future real economic activity for both the euro area and the UK economies. The inclusion of EPU measures, either for the US, the UK or for overall European economies, improves the forecasting ability of models based on standard financial market information, especially for the period before the 2008 global crisis. However, during and after the crisis period, the slope of the yield curve and excess stock market returns improves the out-of-sample forecast performance the most compared to an AR-benchmark model. Hence, the EPU informatio…
A Stochastic Programming Model for the Optimal Issuance of Government Bonds
2010
Sovereign states issue fixed and floating securities to fund their public debt. The value of such portfolios strongly depends on the fluctuations of the term structure of interest rates. This is a typical example of planning under uncertainty, where decisions has to be drawn on the base of the key stochastic economic factors underneath the model.We propose a multistage stochastic programming model to select portfolios of bonds, where the aim of the decision maker is that of minimizing the cost of the decision process. At the same time, we bound the conditional Value-at-Risk, a measure of risk which accounts for the losses of the tail distribution. We build an efficient frontier to trade-off…
Instability tests in cointegration relationships. An application to the term structure of interest rates
2002
Abstract This paper tries to review, from a practitioner's point of view, the recent strand of literature on cointegration tests allowing for structural changes or parameter instability. Thus, we apply several tests using as an example the expectations model of the term structure of interest rates. The results are consistent with the existence of cointegration between the long and the short run Spanish interest rates, with a vector (1,−1), as predicted by the theory. However, there is also evidence of structural instability, mainly at the beginning of 1994, that can be attributed to the financial changes that occurred in Spain as a result of its external commitments in the process of the Eu…
Simulating Term Structure of Interest Rates with Arbitrary Marginals
2007
Decision models under uncertainty need to be feeded with scenarios of the interest rate curve. Such scenarios have to comply, as close as possible, with the empirical distribution of each rate. Simulation models of the term structure usually assume that the conjugate distribution of the interest rates is lognormal. Dynamic models, like vector auto-regression, implicitly postulate that the logarithm of the interest rates is normally distributed. Statistical analyses have, however, shown that stationary transformations (yield changes) of the interest rates are substantially leptokurtic, thus posing serious doubts on the reliability of the available models. We propose in this paper a vector au…
The Impact of Monetary Policy on Bank Profitability
2020
This chapter analyzes the effect of the monetary policy on both net interest margin and bank profitability using a panel data from 31 OECD countries over the period 2000–2017. The main results show that expansionary monetary policy measures adopted in numerous economies had a negative impact on net interest margins and, therefore, on bank profitability. The relationship between interest rates and the slope of the yield curve with both the net interest margin and profitability is non-linear, more specifically concave. This suggests that the negative impact of low interest rates and the flat yield curve is greater the lower and flattened they are, respectively. Therefore, a potential normaliz…
Risk Management for Sovereign Financing within a Debt Sustainability Framework
2018
The mix of instruments used to finance a sovereign is a key determinant of debt sustainability through its effect on funding costs and risks. We extend standard debt sustainability analysis to incorporate debt-financing decisions in the presence of macroeconomic, financial, and fiscal risks. We optimize the maturity of debt instruments to trade off borrowing costs with refinancing risk. Risk is quantified with a coherent measure of tail risk of financing needs, conditional Flow-at-Risk. A constraint on the pace of reduction of debt stocks is also imposed, and we model the effect of debt stocks on the yield curve through endogenous risk and term premia. On a simulated economy, we show that t…
Interest rates, expectations and the credibility of the Bank of Spain
1995
The purpose of the paper is to pinpoint the date of the change of monetary policy regime which occurred in Spain during the year 1984, when it moved away from controlling monetary aggregates towards interest rate targeting. The most likely date for the change is estimated and, surprisingly, there is evidence that agents learned about the new intermediate target quite rapidly.A week after the change, the term structure of interest rates showed how market agents attributed much more informational content to interest rate changes than they had previously. Two types of transitions are tried: a one-step and a gradual logistic swithing function.
A note on nonlinear dynamics in the Spanish term structure of interest rates
2006
Abstract This note applies the methodology to test for threshold cointegration recently proposed by Hansen and Seo (2002) [Hansen, B. E. & Seo, B., (2002). Testing for two-regime threshold cointegration in vector error-correction models. Journal of Econometrics, 110, 293–318] to the Spanish term structure of interest rates during the period 1980:1–2002:12. The evidence suggests that nonlinear cointegration between long and short interest rates is clearly rejected, so that a linear cointegration model would provide an adequate empirical description for the Spanish term structure of interest rate.
THE CARMA INTEREST RATE MODEL
2014
In this paper, we present a multi-factor continuous-time autoregressive moving-average (CARMA) model for the short and forward interest rates. This model is able to present an adequate statistical description of the short and forward rate dynamics. We show that this is a tractable term structure model and provides closed-form solutions to bond prices, yields, bond option prices, and the term structure of forward rate volatility. We demonstrate the capabilities of our model by calibrating it to a panel of spot rates and the empirical volatility of forward rates simultaneously, making the model consistent with both the spot rate dynamics and forward rate volatility structure.
Simulating term structure of interest rates with arbitrary marginals
2011
Decision models under uncertainty rely their analysis on scenarios of the economic factors. A key economic factor is the term structure of interest rates (yields). Simulation models of the yield curve usually assume that the conjugate distribution of the interest rates is lognormal. Dynamic models, like vector auto-regression, implicitly postulate that the logarithm of the interest rates is normally distributed. Statistical analyses have, however, shown that stationary transformations (yield changes) of the interest rates are substantially leptokurtic, thus posing serious doubts on the reliability of the available models. We propose in this paper a VARTA model (Biller and Nelson, 2003) to s…