European Interest Rates Research Articles

Analyzing the Impact of Carbon Risk on Firms’ Creditworthiness in the Context of Rising Interest Rates

Carbon risk, a type of climate risk, is expected to have a crucial impact, especially on high-carbon-emitting, “polluting” firms as opposed to less carbon-intensive, “clean” ones. With a rising number of actions and policies being continuously proposed to mitigate these concerns and an increasing number of investors demanding more climate adaptation initiatives, this transition risk will certainly need to be incorporated into a firm’s credit risk assessment. In this paper, we explore the impact of the carbon risk factor, constructed as the daily median difference in default protection between polluting and clean European firms, on firm creditworthiness using quantile regressions on the tail distribution of credit default swap spreads for different maturities between 2020 and 2023. In particular, the recent European interest rate hikes lead to unexpected conclusions about when the carbon risk factor affects firm creditworthiness and how rapidly the net-zero economy transition must occur. Contrary to the previous literature, we find that investors are expecting the transition to occur in the medium-to-long term.

Pricing of European Interest Rate Options Under Non-Affine Stochastic Volatility and Stochastic Interest Rates

Pricing of European Interest Rate Options Under Non-Affine Stochastic Volatility and Stochastic Interest Rates

THE INFLUENCE OF EUROPEAN INTEREST RATES AND UNCERTAINTY ON THE ECONOMY OF BOSNIA AND HERZEGOVINA

The economy of Bosnia and Herzegovina is a small and open economy, and in addition, it functions in the regime of a fixed exchange rate and limited monetary sovereignty. These facts could enable the influence, first, of the European Central Bank, and then also of the general economic sentiment in the European Union, on the economic processes in BH. The subject of this research was the connection between BH’s economy with its European neighbored and the aim of the research was to measure the degree of influence of European economic variables on BH’ economy, i.e. on its real sector. We were interested in whether, and with what intensity and duration, the benchmark interest rate on the interbank money market in Europe affects wages, employment, industrial production and prices in BH. We started from the assumption that, considering that BH banks are predominantly owned by banking groups from Italy and Austria, there must be an influence of the monetary policy of the ECB, through Euribor, on BH’s economy. But, its influence due to the high domestic sources of financing should not not be too strong. The second channel of influence that we were interested in is related to the effects of growing uncertainty in the EU on the real part of BH’s economy. Given to the fact that the financial markets in Bosnia and Herzegovina are very underdeveloped, with the entity’s public debt market (the Republic of Srpska and the Federation of Bosnia and Herzegovina) as its most developed parts, we assumed a low impact of changes in the degree of uncertainty in which the European financial markets operate on the financial markets of BH, and therefore also on BH’s economy. Conducted research, that is, its main findings showed that our assumptions about the strength of the influence of the European interest rate and uncertainty in the European financial markets on BH’economy were correct. Interest rate channel is passable, and European interbank interest rate influences BH’s economy. The foreign interest rate has highest impact on employment and industrial production and its influence on wages is smaller. These influences are short-term and on average not so intensive, which need to be motive for introduction of new BH’s monetary policy instruments. The consumer prices in BH are not determined by foreign interest rate, and according to that the price dynamic in BH is outside of ECB’s monetary policy scope That is new reason for creation of BH’s monetary regime with greater extent of discretion. In period analyzed changes in uncertainty in European financial market didn’t have significant influence on wages, employment and consumer prices in BH’s economy. Volatility growth on European stock exchanges is visible only in industrial production. The industrial production doesn’t decline on uncertainty impact, but it decreases ex post, intensively and long-term. Relatively low and short-term impact of European financial market on BH’ economy shows difference in BH and European business cycle which imply need for further development of BH’s monetary policy.

EUR/USD Exchange Rate Characterization: Study of Events

This study aims to evaluate the impact of major and minor changes in the Euro Zone and US interest rates on the EUR/USD exchange rate between 1 January 1999 and 31 December 2020. Therefore, twelve events are analyzed in this period, five related to changes in the US interest rate, six related to changes in the European interest rate, and finally, a single event in which both interest rates undergo an equal variation on the same date. The event study methodology was used, which, through the calculation of abnormal returns, makes it possible to evaluate whether there was a repercussion of the events on the value of the EUR/USD exchange rate. This methodology is used in several studies related to capital markets. The obtained results prove that there are abnormal returns with statistical significance on the event days, and, on the days that follow, changes in the interest rates have an impact on the EUR/USD exchange rate; however, there is no clear direction of the asset after the events occur.

Financial market indicators in the context of European integration

Introduction. The application of the European experience of financial market indicators is an actual subject of research for Ukrainian scientists in connection with Ukraine's European integration aspirations. However, the conditions and realities of financial activity in Ukraine are excellent, so the tendency towards blind borrowing needs to be adjusted. The modern financial system of Ukraine is an extremely powerful component of the country's economic body, but there are many questions regarding the increase in the rate of economic instability, especially against the background of Russian military aggression. To further improve the functioning of the financial sphere, the use of financial indicators (opportunities to analyze the system) will become extremely relevant. The purpose of the paper is to investigate European indicators of the financial market that can be used in Ukraine in the conditions of compliance with the course of European integration. Research results. In the paper researched the most popular European interest rate indicators, which are used to determine the cost of long-term lending. The existence of reliable financial indicators is a key condition for the development of the financial market, which makes it possible to influence the mechanisms for determining financial risks. The paper draws attention to the prospects of financial regulation in the conditions of the Eurozone (if Ukraine joins the use of a single common currency) and the possibilities of modern standards of banking regulation. At the same time, there is a need for a strong response to fraud attempts. In particular, in the Federal Republic of Germany, contributors and the indicators declared by them are strictly controlled. Since 2016, EU countries have applied criminal liability for manipulation attempts. Conclusions. Turning to the European experience of using financial indicators is relevant for Ukraine, especially in view of European integration aspirations. However, in order to meet modern requirements, there is a need to update the regulatory and legislative framework. Specific measures for reforms can become a separate object for research.

On the Resolution of a Remarkable Bond Pricing Model from Financial Mathematics: Application of the Deductive Group Theoretical Technique

The classical Cox–Ingersoll–Ross (CIR) bond-pricing model is based on the evolution space-time dependent partial differential equation (PDE) which represents the standard European interest rate derivatives. In general, such class of evolution partial differential equations (PDEs) has generally been resolved by classical methods of PDEs and by ansatz-based techniques which have been previously applied in a similar context. The author here shows the application of an invariant approach, a systematic method based on deductive group-theoretical analysis. The invariant technique reduces the scalar linear space-time dependent parabolic PDE to one of the four classical Lie canonical forms. This method leads us to exactly solve the scalar linear space-time dependent parabolic PDE representing the CIR model. It was found that CIR PDE is transformed into the first canonical form, which is the heat equation. Under the proper choice of emerging parameters of the model, the CIR equation is also reduced to the second Lie canonical form. The equivalence transformations which map the CIR PDE into the different canonical forms are deduced. With the use of these equivalence transformations, the invariant solutions of the underlying model are found by using some well-known results of the heat equation and the second Lie canonical form. Furthermore, the Cauchy initial-value model of the CIR problem along with the terminal condition is discussed and closed-form solutions are deduced. Finally, the conservation laws associated with the CIR equation are derived by using the general conservation theorem.

A UNIFIED MARKET MODEL FOR SWAPTIONS AND CONSTANT MATURITY SWAPS

Internal-rate-of-return (IRR) settled swaptions are the main interest rate volatility instruments in the European interest rate markets. Industry practice is to use an approximation formula to price IRR swaptions based on Black model, which is not arbitrage-free. We formulate a unified market model to incorporate both swaptions and constant maturity swaps (CMS) pricing under a single, self-consistent framework. We demonstrate that the model is able to calibrate to market quotes well, and is also able to efficiently price both IRR-settled and swap-settled swaptions, along with CMS products. We use the model to illustrate the difference in implied volatilities for IRR-settled payer and receiver swaptions, the pricing of zero-wide collars and in-the-money (ITM) swaptions, the implication on put-call parity, and the issue of negative vega. These findings offer important insights to the ongoing reform in the European swaption market.

The Effect of Exchange Rates and Interest Rates of Four Large Economies on the Health of Banks in ASEAN-3

This study examines how the health of the banks in ASEAN-3 countries namely Indonesia, Malaysia and Thailand respond to the change in exchange rates and foreign interest rates in four large economies. The transmissions of the two external factors through domestic factors in each ASEAN-3 countries eventually affects Non-Performing Loan (NPL) of commercial banks. This study uses the monthly time series data and the renowned Structural Vector Autoregressive (VAR) model comprising five variables, namely exchange rate, foreign interest rate, domestic interest rate, money supply, and non-performing loan (NPL). The results indicate that there are different effects between ASEAN-3 countries, which can be classified as short-run effect and long-run effect. In the long run effect, external factors have a dominant role in determining NPL in ASEAN-3 countries. Yuan has the biggest effect on Malaysia's NPL, while Indonesia is more affected by European interest rates rather than the fluctuation of the US currency and China's interest rates. Among ASEAN-3 countries, Malaysia is the one that is the most vulnerable to external factors. While Thailand's NPL is affected dominantly by domestic factors. This study shows that the Fed Funds Rate (US official interest rate) is not always the dominant factor affecting the health of domestic banks in ASEAN-3.

Influencia del sector externo en la liquidez ecuatoriana, 2000-2016

The purpose of this paper is to study the influence of the representative variables of the external sector within the Ecuadorian liquidity, for the period dollarized between the years 2000 to 2016, specifically focusing on the variables European and American international interest rate, exchange rate, assets and exportations. In addition, this paper analyzed the impact of liquidity on the gross domestic product. As can be seen from the results obtained, the country is more vulnerable to different external shocks, mainly, it is more sensitive to the foreign interest rate. Keywords: External sector, liquidity, balance of payments, exchange rate, dollarization. URL: https://revistas.uta.edu.ec/erevista/index.php/bcoyu/article/view/919

La structure des taux revisitée pour période de crise : entre contagion, flight to quality et quantitative easing

Cet article cherche à évaluer le rôle spécifique des risques de volatilité et de covolatilité dans la formation des taux d’intérêt à long terme de la zone euro sur les périodes de crise et post-crise, marquées par un rôle actif de la BCE. On propose pour cela un modèle de choix de portefeuille obligataire à deux pays qui permet de généraliser les résultats de la théorie traditionnelle de la structure par terme des taux d’intérêt. Les taux longs d’équilibre dépendent crucialement des covariances anticipées par les investisseurs sur les rendements obligataires. Des covariances anticipées positives amplifient les phénomènes de contagion par les fondamentaux en cas de dégradation des finances publiques, tandis que des covariances négatives amplifient les phénomènes de flight to quality . Le modèle est estimé économétriquement dans un cadre GARCH bivarié sur 21 paires de marchés obligataires souverains observés sur la période janvier 2006-septembre 2016. Cette évaluation empirique fait ressortir trois résultats importants. 1) La baisse des taux longs allemand et français très tôt dans la crise, à partir de mars 2011, a trouvé un support important dans la baisse des covariances anticipées vis-à-vis des pays périphériques, qui a véritablement amplifié le processus de flight to quality . 2) La logique des choix de portefeuilles optimaux, révélée par la sensibilité des taux longs aux risques de volatilité, semble disparaître pendant la crise pour réapparaître ensuite, à partir de la mise en place de l’OMT. 3) Un test à la Forbes et Rigobon [2002] sur les composantes non fondamentales des taux longs ne permet pas de conclure que le QE de la BCE, à partir de mars 2015, a véritablement entraîné une re-corrélation des marchés obligataires de la zone euro. Ce paradoxe s’explique par le fait que ces corrélations étaient déjà en moyenne élevées à la suite de l’OMT.

Debt Relief for the EMU Countries: A Chance to Restore Europe’s Power and to Stabilize the Euro. – A Discussion Paper

Government spending on bailing out banks and financing a variety of stimulus packages following the US real estate and financial crisis led to a sharp increase in the already very high level of public debt also of the member countries of the European Monetary Union (EMU). Countries such as Greece, Italy, Belgium, France and even Germany in particular depend on very low or at least low interest rates to stabilize their financial situation. Thus, the central reason for the European Central Bank's low interest rate policy, which has been in place for almost 10 years, is to provide the highly indebted countries of the EMU with a significant reduction in the interest burden in favor of a solution to the debt problem: giving time for a lot of necessary reforms to increase economic development. But none of this has succeeded in the last 10 years. Instead, the budgetary situation in the euro countries is getting worse, the disparities in economic development are increasing rather than diminishing, thereby endangering the stability of the euro and thus the future of the single currency. There is an urgent need for sustained higher net investments in nearly all sectors of all countries from Greece to Germany: instead, net investment in the countries of the EMU is clearly decreasing and Europe is in danger of being left behind not only by the two economic powers USA and China. This outlines a problem that is as pressing as it is topical: the question of how to restore Europes’ economic power. The key lies in the question of how can we be able to solve the crippling debt problem of European countries quickly and sustainably. The answer given by the discussion paper is a kind of debt relief, implemented as a conversion of a relevant amount of the government bonds held by the ECB. Conversion means extending the repayment to 80-100 years and the interest rate to be set very low. Of course a binding agreement is inevitable that net new debt can only be taken up to the maximum value of the GDP growth of a certain period. Only countries can participate in the debt conversion which commit themselves to making higher net investments to be specified more precisely, to carry out reforms especially concerning the efficiency of taxation, respectively set lower and upper limits for some taxes of the central government, and harmonize them within narrow ranges. Also it is necessary to reasonably reduce and largely deregulate bureaucracy and put an end to shadow economy and corruption. By regaining financial strength as a result of a debt conversion, which is only possible within a strong supranational framework, the advantages of membership in the European Monetary Union will once again become evident, and the European Union can again become a shining example of freedom and prosperity, the way that Robert Schuman did formulate as a vision in.

PENGARUH FAKTOR MAKROEKONOMI DAN KEBIJAKAN MONETER NEGARA MAJU TERHADAP YIELD OBLIGASI INDONESIA

This study aims to determine the influence of macroeconomic factors and monetary policy of developed countries on Indonesian bond yields. The independent variables in this study are inflation as X1, foreign exchange reserves as X2, M2 money supply as X3, American interest rates as X4, European interest rates as X5, and the dependent variable of Indonesian government bond yield as Y. The data used is secondary data in the form of time series data from 2008Q1 to 2018Q4, with data collection techniques, namely documentation from Bank Indonesia publications, Central Statistics Agency, investing.com sites and library studies. The research method used is (1) Multiple Linear Regression, (2) Classical Assumption Test, (3) coefficient of determination. The results of this study indicate that: (1) inflation has a significant positive effect on Indonesian bond yields. (2) Foreign exchange reserves have a significant negative effect on Indonesian bond yields. (3) M2 money supply has no effect on Indonesian bond yields. (4) American interest rates have a significant positive effect on Indonesian bond yields. (5) European interest rates do not have a significant positive effect on Indonesian bond yields.

A Unified Market Model for Swaptions and Constant Maturity Swaps

Internal-rate-of-return (IRR) settled swaptions are the main interest rate volatility instruments in the European interest rate markets. Industry practice is to use an approximation formula to price IRR swaptions based on Black model, which is not arbitrage-free. We formulate a unified market model to incorporate both swaptions and constant maturity swaps (CMS) pricing under a single, self-consistent framework. We demonstrate that the model is able to calibrate to market quotes well, and is also able to efficiently price both IRR-settled and swap-settled swaptions, along with CMS products. We use the model to illustrate the difference in implied volatilities for IRR-settled payer and receiver swaptions, the pricing of zero-wide collars and in-the-money (ITM) swaptions, the implication on put-call parity, and the issue of negative vega. These findings offer important insights to the ongoing reform in the European swaption market.

PENGARUH PERGERAKAN NILAI TUKAR DAN VOLUME TRANSAKSI TERHADAP PENDAPATAN TRANSAKSI DEVISA (STUDI KASUS PADA PT. BII, TBK KANTOR CABANG BOGOR)

Exchange or conversion rate is one of the important factors in an open economy since its big impact on the running transaction balance, foreign balance or other economical factors. Exchange rate plays a central role in international trade because exchange rate enables us to compare all products and services prices from other countries. The policy to predict and react on the exchange rate fluctuation is developing in line with the growing understanding of how the national and international monetary systems work. In addition transparency in accounting and taxation rules concerning the un/profitability from the exchange transactions and more familiar of economical effect of foreign currencies on cash flow and market value in the future. This research was carried out at PT. BII Ltd. Bogor Branch Office, and based on the problems, the purposes of the study were: (1) to know what factor that influence the movement of exchange rate (2) to see whether the movement and the volume of the exchange rate have significant relationship on the income from foreign exchange transactions (3) to identify if there is an influence of foreign exchange movement on the income from foreign exchange transactions and (4) to know is there an influence of transaction volume on the income from foreign exchange transactions. There were several factors that influence the foreign exchange rate on US Dollar, they are: (1) economical foundation (including inflation rate, BI interest rate, government control and income rate) (2) external factors (including American interest rate and policy, the rise of world crude oil price, European interest rate, American economic condition etc.) (3) market bias (including supply and demand, expectation and rumors). The influence of both foreign exchange rate (FER) and transaction volume (TV) analysis on the income of foreign exchange transactions (IFET) at PT. BII Ltd. Bogor Branch Office the writer found the regression equation as = -432050000.042 + 4762.800NT + 0.000595VT. The doubled regression linear of collected data gave a parameter value 4762.800NT and 0.000595VT and a constant value -432050000.042. The double correlation of the FER variable and the TV on the IFET at this company was positive and the coefficient correlation (r) was 0.577. The determinant coefficient (r squared) was 0.333 that means 33.30% of the IFET variety was caused by doubled regression between the IFET with FER and TV. The remaining 66.70% was explained by variables other than FER and TV that influence the IFET.

Interest Rate Swaptions - A Review & Derivation of Swaption Pricing Formulae

In this paper we outline the European interest rate swaption pricing formula from first principles using the Martingale Representation Theorem and the annuity measure. This leads to an expression that allows us to apply the generalized Black-Scholes result. We show that a swaption pricing formula is nothing more than the Black-76 formula scaled by the underlying swap annuity factor. Firstly we review the Martingale Representation Theorem for pricing options, which allows us to price options under a numeraire of our choice. We also highlight and consider European call and put option pricing payoffs. Next we discuss how to evaluate and price an interest swap, which is the swaption underlying instrument. We proceed to examine how to price interest rate swaptions using the martingale representation theorem with the annuity measure to simplify the calculation. Finally applying the Radon-Nikodym derivative to change measure from the annuity measure to the savings account measure we arrive at the swaption pricing formula expressed in terms of the Black-76 formula. We also provide a full derivation of the generalized Black-Scholes formula for completeness.

Applicability of Negative Interest Rate Policy under China’s New Normal<br/>—Based on the Comparison of European Negative Interest Rate Policy

The Chinese economy has entered a new normal, superimposing the impact of the trade war. The financial support of Chinese commercial banks for small and medium-sized enterprises is still insufficient, leading to the problem of financing difficulties for small and medium-sized enterprises and the poor transmission of monetary policy. In order to study how to promote Chinese commercial banks to follow the monetary policy orientation, increase financial support for small and medium-sized enterprises, and promote the transformation of economic development, this paper uses a comparative analysis method, through the comparative analysis of the economic environment of China and the EU. The author believes that the negative nominal interest rate policy of the euro zone countries can be of reference to China and can have a positive economic impact.

Modelling European sovereign bond yields with international portfolio effects

This paper proposes a portfolio choice model with two countries to evaluate the specific role of volatility and co-volatility risks in the formation of long-term European interest rates over the crisis and post-crisis periods with an active role of the European Central Bank. Long-term equilibrium rates depend crucially on the covariances between international bond yields anticipated by investors. Positively anticipated covariances amplify the phenomena of fundamental contagions related to the degradations of public finance and solvency of sovereign debt issuer, while negatively anticipated covariances amplify the phenomena of Flight-to-quality. The two-step econometric approach over the period January 2006 to September 2016 analyses 21 European market pairs in a bivariate GARCH framework. Empirical results show that the decline in German and French long-term rates from March 2011 is partially due to the decrease in both risk premium and covariances with periphery countries. These declines actually amplify the mechanisms of Flight-to-quality. Finally, a lower sensitivity of rate to volatility and co-volatility risks during the crisis period gives credit to the hypothesis of a occasional fragmentation of the European sovereign bond markets (De Santis and Stein, 2016; Ehrmann and Fratzscher, 2017).

Multi Yield Curve Stress-Testing Framework Incorporating Temporal and Cross Tenor Structural Dependencies

We develop a new multi-curve modelling framework for the term-structure of interest rates that can generate consistent cross-country stressed scenarios allowing for significant spillover effects between economies. Modern models of the term structure of interest rates typically fail to capture jointly time and cross-curve dependencies and are not used for stress-testing purposes. Our methodology is able to jointly model the temporal and cross-country dependence structure of interest rate curves and associate movements in the interest rates and cross-country spreads with movements in macroeconomic variables as well as market-wide and country-specific measures of liquidity and credit quality. We apply our methodology to generate contemporaneous stressed scenarios to a set of European yield curves. Motivated by the recent eurozone debt crisis, we apply shocks to Italian and Spanish liquidity and credit variables and evaluate the impact of these shocks on several bond portfolio strategies. The empirical findings suggest that both country-specific liquidity and credit measures are important in explaining the dynamic behaviour of European sovereign interest rate curves and their dependence structure. Nevertheless, their importance varies across time, shock types and investment horizons.

Forecasting European interest rates in times of financial crisis – What insights do we get from international survey forecasts?

Interest rate forecasts are widely used in the international financial services industry. For decades, both practitioners and academic researchers question the quality and usefulness of forecasts. Survey predictions do not only deliver point forecasts but also allow to draw conclusions with regard to the variety of forecasts provided by professional analysts. We evaluate the quality of interest rate forecasts for the three months interbank rate in the UK (LIBOR) and Germany (EURIBOR) as well as the corresponding 10Y government bond yields using the root mean squared error as well as the Theil’s U measure and also apply models of time series analysis (i.e. cointegration and causality analysis). Finally, we check for possible implications from uncertainty measures (i.e. High-Low-Spread of forecasts as well as forecast errors) and structural breaks. We are able to find some links to the real economy. Applying our methodological approach both to the UK and Germany we are able to draw conclusions with regard to the quality of international forecasts in times of uncertainty.

European and global financial integration: some panel evidence of the convergence of interest rates

This paper seeks to contribute to the literature on financial integration using panel estimates to test beta- and sigma-convergence across the European Union countries’ interest rates and towards two specific benchmarks — the German and US rates — covering the time interval between 1999 and 2014 and taking into account the recent international financial crisis. The findings point to the existence of a process of convergence of interest rates and this process may be considered as part of the global process of integration. Furthermore, there is evidence of convergence to the chosen benchmarks, in particular of short-term real interest rates; the speed of this convergence towards the German rates clearly increased in the EU as a response to the financial crisis. Keywords: financial integration, banking market, European interest rates, beta-convergence, sigma-convergence, panel data estimates. JEL Classification: C2, E4, F3, G1, G2