Changes In Market Interest Rates Research Articles

Blok Zinciri, Kripto Para Muhasebesi ve Piyasa Dinamikleri: Kripto Para Değerlemeleri ve Piyasa Faiz Oranları Arasındaki Korelasyon

In this study, the five most well-known cryptocurrencies in the blockchain-based decentralized financing structure were compared with the centralized market interest rates, and it was examined whether there is a significant relationship between the changes in market interest rates and the prices of cryptocurrencies. Key findings indicate a significant relationship between most cryptocurrencies, such as Dash, Litecoin, Ethereum, and Bitcoin, with market interest rates. However, XRP emerges as an exception. In addition to the comparative analysis between cryptocurrencies and market interest rates, this study delves into the underlying mechanisms that govern these relationships. It explores the role of blockchain technology in shaping the decentralized financing structure and highlights the intricacies of various cryptographic algorithms. The research also emphasizes the need for specialized accounting practices that cater to the unique challenges posed by cryptocurrencies. This study bridges the understanding between conventional economic mechanisms and the innovative world of cryptocurrencies, offering inferences that are important for investors, financial analysts, and accountants in the digital age.

ФОРМУВАННЯ ПОРТФЕЛЯ ФІНАНСОВИХ ПЛАТІЖНИХ ЗОБОВ’ЯЗАНЬ, ЗАХИЩЕНОГО ВІД СИСТЕМАТИЧНИХ РИЗИКІВ

Developing a model for studying banking operations related to financial risk seems to be very promising. Banks with heterogeneous fundamental funds often face a potential outflow of their creditors. The ability to affect a particular bank depends on the intermediate liquid value of its assets, whereas the latter value endogenously depends on the status of other banks in the asset market. Mathematical modeling of economic risks forms an idea of the peculiarities of modern economic risks, including financial ones. The study of various ECONOMIC-MATHEMATICAL MODELING Issue IІ (90), 2023 119 aspects of financial risk is one of the fundamental concepts of modern economic theory and management, as well as is increasingly being applied in practice in all areas of economic activity. Obviously, it is not necessary to use experience and intuition in economic activity. However, it is essential to possess the information about the causes of risk situations and to carry out qualitative and quantitative risk analysis. The purpose of the article is to develop a mathematical model of immunizing a portfolio of financial transactions and to study the immunization of a portfolio of financial payment obligations regarding the risk of changes in market interest rates. The article identifies the basic typical models of investment portfolios and studies the methods of portfolio optimization, using different types of financial instruments. Initially, it is necessary to study the net present value of payments (NVP), for which the NVP formula is introduced. Next, the main factor of change in the yield curve should be taken into account - a parallel shift by the value of h (NPV(h)) so that NPV(h)- NPV(0) is minimal, using a more complex deformation of the yield curve. To mitigate this risk, it is important to apply factor immunization, however, with a due regard to the three factors that describe almost all changes in structural interest rates. All studies are formulated in the form optimization problems. To protect a portfolio from market risk, its structure needs to be rebuilt. Therefore, the possible volatility and liquidity risks for the existing portfolio of financial liabilities have to be taken into consideration as well.

Behavior of Canadian life annuity prices

AbstractWe examine the behavior of Canadian life annuity prices by measuring how quickly and fully they respond to changes in market interest rates. The price responses, though not immediate, start relatively quickly and become more complete over time. Over the whole sample period, the responses appear to be asymmetric – annuity providers generally raise prices faster when interest rates decline than reduce prices when the opposite occurs, which is disadvantageous to annuity customers. In addition, we find unusual annuity price behavior during the period of the 2008 financial crisis.

PENGARUH KONVEKSITAS TERHADAP SENSITIVITAS HARGA JUAL DAN DELTA-NORMAL VALUE AT RISK (VAR) PORTOFOLIO OBLIGASI PEMERINTAH MENGGUNAKAN DURASI EKSPONENSIAL

Bonds are one of the investment instruments issued by the issuer as proof of debt. Bond investment is relatively safe, but it is possible for investors to experience losses. Investors should always consider that trading a bond is always risky. One of the important bond risks is interest risk. The concept of duration can only explain well for small changes in interest rates but cannot explain well for large changes in interest rates. The estimation of the duration concept will have a larger calculation error with the greater changes in market interest rates that occur so it is necessary to add convexity to improve accuracy. This study aims to estimate the risk of government bonds based on the estimation of bond prices with the effect of convexity. Several studies have shown that exponential duration can predict bond prices more accurately than Macau duration. Exponential duration with convexity will be applied in this study to measure the accurate value of bond prices caused by changes in interest rates. The Delta-Normal VaR portfolio method is used to calculate risk based on estimated bond prices in the form of a portfolio. The formation of this portfolio aims to reduce the losses suffered by investors. This method is applied to four Indonesian government bonds with codes FR0056, FR0059, FR0074, and FR0080. The results showed that the bonds portfolio FR0056 and FR0074 had the smallest risk compared to other portfolios with a weight proportion of 15% for bonds FR0056 and 85% for bonds FR0074.

The Empirical Study of Interest Rate Pass-Through in Cambodia: An Error Correction Model

ABSTRACT The error correction model was used to explore the influence of domestic and international interest rates, proxied by the 6-Month and 1-Year SIBOR, on the borrowing interest rate of bank. The primary goal of this study was to determine the pass through from the predicted borrowing rate to the lending rate. The empirical findings of this study confirmed the existence of a long-run relationship between the borrowing rate and its explanatory variables, as evidenced by the two-step co-integration test. Domestic and foreign interest rates have a substantial long-run influence on the borrowing rate. Short-term borrowing rate changes were also impacted by changes in market interest rates and SIBOR rates. The predicted borrowing rate from co-integration equation had a positive significant impact on the lending rate claimed that there had a pass through from foreign to domestic lending rate. Keywords: ECM, Interest rate pass through, Borrowing rate, Market Rate, SIBOR.

Assessing the Market Risk on the Government Debt of Kazakhstan and Bulgaria in Conditions of Turbulence

The purpose of this publication is to quantify and compare the market risk on the external government debt of Kazakhstan and Bulgaria in the conditions of COVID-19, the emerging energy crisis, and the coup attempt in the first country. In particular, the authors invest the market risk of sovereign bonds issued on global financial markets. Market risk is assessed both as a single issue and at a portfolio level using the Value-at-risk approach. Sixteen samples with historical observations of all issues of Kazakhstan’s and Bulgarian Sovereign Bonds issued on the international financial markets were formed. The duration method was used in the calculation of Delta normal bond VaR and CVaR. It was found that with the same credit rating, similar portfolio duration levels, similar GDP per capita, Debt (% of GDP), and Debt Per Capita, the market risk on their portfolio differed significantly. The comparison of risk levels between the two portfolios was made by six indicators–two indicators measuring linearly the sensitivity of bond prices to changes in market interest rates (Weighted average Macaulay duration and Weighted average modified duration) and four downside indicators (Undiversified VaR, Diversified VaR, Undiversified CVaR, amd Diversified CVaR). The return/risk performance of both portfolios was assessed by the Sharpe ratio in three variants (SR Undiversified VaR, SR Diversified VaR, and SR Diversified CVaR). When evaluating the bond portfolio VaR and CVaR, a practical version of the Duration method was proposed, which allows the use of an unlimited number of assets, taking into account the correlations between yield returns and historical price volatility.

The pass-through effect of unconventional monetary policy to net interest income structure of European banks

Purpose: Financial banking intermediaries are sensitive to changes in market interest rates. The volatility of market interest rates affects the level of bank net interest income and determines the bank interest rate policy. Banks are actively managing structural interest rate risks to mitigate the negative effects of changes in market interest rates. The post-crisis period is characterised by unconventional monetary policy, and one of the basic objectives of the monetary instrument is a negative interest rate policy. This paper researches the effects on the bank net interest income structure with an impact on bank performance indicators. The basic research hypothesis is that during the financial crisis and a negative interest rate policy, the movement of bank interest income does not converge compared to a bank interest expense. Methodology: According to the characteristics of the dataset, which includes 32 listed banks from Great Britain, Switzerland and the European Union for the period 2002-2019, panel data analysis is applied. To analyse the effect of the interest rate level on total interest income and total interest expense, we formed two models. Fixed-effects models were used for parameter estimation. Results: A bank interest expense is more sensitive to unconventional macroeconomic policy than bank interest income. Conclusion: The traditional interest earning customer related business can enable banks to stabilise the bank performance indicator during market disruption.

Placing the Czech Shadow Banking Sector under the Light

The size of the shadow banking sector (SBS) has more than doubled in the Czech Republic over the last decade. This places a potential burden on policy makers. On the one hand, the SBS complements regular banking by expanding access to credit and investments, enabling better risk sharing and maturity transformation, and sup-porting market liquidity. On the other hand, SBS activities can put the stability of the financial system at risk and amplify its procyclicality by exacerbating the build-up of leverage and asset price bubbles. We implement a FAVAR model of the Czech economy to determine the impact of macroeconomic factors on the SBS. We find that the SBS: (i) is sensitive to changes in market interest rates and term spread; (ii) exhibits great procyclicality; (iii) can act as a complement to regular banking and satisfy some additional demand for credit. We also define some potential risks of continued growth of the SBS, linked to our empirical evidence.

The Global Financial Crisis and Retail Interest Rate Pass-Through in Australia

In this paper, we examine the impact of the global financial crisis (GFC) on the interest rate pass-through for four types of loans in Australia: mortgages, residentially secured small business lending, nonsecured small business lending and personal loans. Australia is an interesting case study since its central bank lowered but also raised interest rates during the GFC. We find that after the onset of the crisis, there has been a shift in the way banks adjust their lending rates in response to changes in market interest rates; the markup has increased and there has been a drop in both short- and long-term pass-through from funding costs to lending rates. Closer analysis indicates that the drop in short-term pass-through is due to the slower response of banks to increases in funding costs. We also find asymmetries in the way banks adjust lending rates in relation to funding costs in the long-run for nonsecured small business lending and personal loans. The evidence shows that banks in Australia tightened lending standards and competed less aggressively for loans but more for deposits in response to heightened default risks following the global financial crisis. The wider margin allows banks to adjust their lending rates more slowly and asymmetrically.

Sustainability of Local Government Sector Debt. Evidence from Monte-Carlo Simulations

The financial standing of local governments across the European Union was strongly affected by the economic crisis. The local government sector conducted vast investment policies reaching 10.2% of all investments in the EU countries in 2010. However, at the same time its indebtedness expanded significantly. The current low interest rate environment makes the sector vulnerable to future interest rate increases. The presented research analyses the impact of several scenarios of interest rate changes in Poland on the local governments’ ability to service their current debt burdens. Simulations are conducted with the Monte Carlo method. Some scenarios indicate a high vulnerability of local governments to adverse changes in market interest rates, but only if they are combined with a reduction of sector’s operating surplus. Such an economic setup may give rise to systemic problems for the whole public sector.

Interest Rate Risk Management by Indian Scheduled Commercial Banks: Evidence Using Linear Programming Problem and Panel Data Analysis

This paper intends to explore one of the relatively less highlighted area viz. interest rate risk management by Indian banks with a view to providing an innovative edge to the specific area in the Indian context. Firstly, the paper aims at building empirical relationships between the average yields on assets and liabilities of Indian banks - taking one at a time on the one side - and short-term and long-term interest rates taken one at a time on the other side. Secondly, this paper estimates the impact of (i) slope of the yield curve and (ii) changes in market interest rates on the banks’ net interest margins. Thirdly, the paper attempted to optimise the level of net interest margins of Scheduled Commercial Banks of India with respect to (i) short-term interest rate and (ii) long-term interest rate. The panel data on average yields on assets and liabilities and net interest margins of 64 Scheduled Commercial Banks of India has been undertaken for the study period starting from March 2002 to March 2011. The time series on short and long-term interest rates are also collected for the same period. This paper uses the panel cointegration tests and shows that average yields on assets and liabilities of Indian banks are closely tied to long-term interest rate. The fixed-effects regression analysis highlights that change in long-term interest rate significantly impacts net interest margins of Indian SCBs, implying that Indian banks are exposed to interest rate risk. Finally the study achieves its main objective by solving a linear programming problem with the help of simplex method and determines the maximum level of net interest margin of Indian SCBs, which comes out to be 5.734 per cent over the studied period, if long-term interest rate would have been 11.781 per cent.

Can an Accounting-Based Duration Model Effectively Measure Interest Rate Sensitivity?

I examine whether a duration transformation of financial accounting information adequately captures interest rate sensitivity in financial institutions. First, I calculate an ex-ante measure of interest rate sensitivity in complex banking institutions based upon a model developed by bank supervisors at the Federal Reserve Board of Governors; the duration measure is a combination of financial accounting information and duration proxies. Second, I test for an association between this ex-ante measure of interest rate sensitivity and both accounting and capital market ex-post measures of interest rate sensitivity. The results show a predictable relationship between ex-ante modeled interest rate sensitivity and banks’ ex-post accounting performance and stock returns given observed changes in market interest rates. I conclude that an interest rate sensitivity model based upon a combination of financial accounting information and duration proxies can be used to predict interest rate sensitivity in complex banks, including publicly-traded bank holding companies. The issue is important because interest rate risk management is integral to financial institutions, and its reliable measurement using publicly-available accounting data is relevant to bank managers, researchers, market participants, and regulators.

Portfolio maturity choice of Australian cash management trusts

Money Market Mutual Funds, known in Australia as Cash Management Trusts (CMTs), provide potential benefits for retail investors from pooling of funds and superior portfolio (maturity) management skills. The average maturity of CMT assets exhibits significant variation both cross sectionally and over time, but there is significant correlation between the asset maturities of different CMTs. These variations could reflect decisions about optimal asset maturity by CMT management, given their expectations of future interest rate movements. This paper examines (and rejects) the hypothesis that CMT management has superior interest rate forecasting ability by testing whether asset maturity of CMTs provides any information about future interest rate movements. The correlation between CMT maturity decisions appears to reflect the tendency of some CMTs to adjust maturity in response to current changes in market interest rates.

On the Conceptual Inadequacy of the Original Cost Regulatory System

The original cost regulatory system, as currently used in the regulation of utilities and natural gas pipelines, cannot emulate the response of a competitive firm to high and varying inflation. Although there can be many problems introduced by regulatory lag and by high administrative and hearing costs for all parties, these do not cause the difficulties we are concerned about here. The response of the original cost system to inflation, even when it is applied with no errors or lag, will be non-competitive, socially wasteful, and politically unsatisfactory. The system is conceptually flawed in a fundamental fashion that causes it to breakdown in times of high and varying inflation. It is possible to design a version of original cost regulation that responds appropriately to changes in expected inflation by using changes in interest rates, but such a system still won't deal properly with actual inflation when it differs from expected inflation. To emulate the response of a competitive return to actual inflation, we must use a version of original cost regulation that makes use of changes in a price index rather than changes in market interest rates.

Interest Rate Pass-Through: Empirical Results for the Euro Area

AbstractThis paper empirically examines the interest rate pass-through at the euro area level. The focus is on the pass-through of official interest rates, approximated by the overnight interest rate, to longer-term market interest rates, which, in turn, are a proxy for the marginal costs for banks to attract deposits or grant loans, and therefore passed through to retail bank interest rates. Empirical results, on the basis of a (vector) error-correction and vector autoregressive model, suggest that the pass-through of official interest to market interest rates is complete for money market interest rates up to three months, but not for market interest rates with longer maturities. Furthermore, the immediate pass-through of changes in market interest rates to bank deposit and lending rates is found to be at most 50%, whereas the final pass-through is typically found to be close to 100%, in particular for lending rates. Empirical results for a sub-sample starting in January 1999 show qualitatively similar findings and are supportive of a quicker interest rate pass-through since the introduction of the euro. It is shown that the difference between the adjustment speed of bank deposit and lending rates (typically around one versus three months since the common monetary policy) can to a large extent significantly be explained by credit risk considerations.

The Impact of Monetary Policyon the Bilateral Exchange Rate: Chile Versus the United States

This paper examines the reaction of the bilateral Ch$/US$ exchange rate to monetary policy actions in Chile and the United States. The approach is to regress the change in the exchange rate following a policy announcement on changes in market interest rates in response to the same announcement. U.S. monetary policy actions that raise the three-month treasury bill rate by 1 percentage point lead to depreciations of the Chilean peso by about 1.5 to 2 percent. The exchange rate also reacts to monetary policy actions in Chile, but the response appears to be smaller, and cannot be estimated with much precision on the available sample.

Optimal Loan Interest Rate Contract Design

This paper analyzes optimal loan interest rate contracts under conditions of risky, symmetric information for one-period (static) and multi-period (dynamic) models. The optimal loan interest rate depends upon the volatility of, and co-variation among the market interest rate, borrower collateral, and borrower income, as well as the time horizon and the risk preferences of lenders and borrowers. For a risk-averse borrower with stochastic collateral, variable interest rate contracts are, in general, Pareto optimal. For plausible assumptions, the optimal loan interest rate for the multi-period model often exhibits “muted” responses to changes in market interest rates, making fixed rate loans a reasonable approximation for the optimal loan. Hence, in the absence of optimal contracts, long-term (short-term) borrowers tend to prefer fixed rate (variable) contracts.

The Impact of Monetary Policy on the Bilateral Exchange Rate: Chile Versus the United States

This paper examines the reaction of the bilateral Ch$/US$ exchange rate to monetary policy actions in Chile and the United States. The approach is to regress the change in the exchange rate following a policy announcement on changes in market interest rates in response to the same announcement. U.S. monetary policy actions that raise the three-month treasury bill rate by 1 percentage point lead to depreciations of the Chilean peso by about 1.5 to 2 percent. The exchange rate also reacts to monetary policy actions in Chile, but the response appears to be smaller, and cannot be estimated with much precision on the available sample.

The Operations of the Bank of England, 1890-1908: A Dynamic Probit Approach

This paper analyzes the workings of the pre-World War I gold standard using weekly data and a dynamic probit econometric technique. The authors' evidence sheds light on three potentially conflicting motivations underlying bank rate changes: profitability, convertibility, and concern for home trade. The conflict among these goals manifests itself in the Bank's asymmetric responses to inflows and outflows of gold and in the Bank's asymmetric responses to changes in market interest rates. The authors' results are consistent with the view that central bank cooperation played an important role in the workings of the gold standard. Copyright 1995 by Ohio State University Press.

PREPAYMENT RISK AND THE DURATION OF DEFAULT‐FREE MORTGAGE‐BACKED SECURITIES

AbstractThe conventional duration measure for mortgage‐backed pass‐through securities assumes that the prepayment rate is invariant to changes in market interest rates. In this paper, the conventional duration is modified to take into account the interest‐rate sensitivity of mortgage prepayments. Including interest rate sensitivity is shown to reduce substantially the duration of a mortgage‐backed pass‐through security when the current mortgage rate is less than the contract rate.