Benchmark Interest Rate Research Articles

Upcoming Christmas jump in LIBOR

Background: London Interbank Offered Rate (LIBOR) exists since 1986 as a benchmark interest rate. Methods: Using two-layer linear regression method, we found a pattern of shortterm nature in LIBOR behaviour. Results: To wit, 2-month LIBOR experiences a jump after Xmas for the last two decades. The direction and size of the jump depend on the data trend on 21 days before Xmas. Conclusions: The obtained results can be used to build a winning strategy on the Swap Market.

The Reserve Bank of Australia’s policy actions and balance sheet

The Australian economy has been significantly affected by the Covid-19 virus and the associated health policy actions. This has warranted a comprehensive policy response from both fiscal and monetary policy. The monetary policy response has been directed at supporting households and businesses by keeping funding costs low and ensuring credit is available. The monetary policy actions have worked as expected by lowering the key interest rate benchmarks in the economy to historically low levels, which has been transmitted through to historically low borrowing rates for households and businesses, as well as governments.

ANALISIS PENGARUH SUKU BUNGA TERHADAP KINERJA KEUANGAN DAN KINERJA SAHAM PERBANKAN DI INDONESIA

The interest rate change policy is also considered by investors to influence the banking performance of financial performance and changes in stock prices. The policy of determining the benchmark interest rate is considered to be an important thing that can affect the banking sector, both in terms of financial performance and stock performance. This research was conducted in all three Banks Book and four Banks Book listed on the IDX by analyzing the Bank's annual financial statements as well as the trend of the movement of the company's stock performance from 2010 to 2018. Bank financial performance is an important factor that needs to be considered to improve stock performance . This is due to the processing results showing a significant influence besides the interest rate policy known to have a significant effect on the performance of bank shares.
 Keywords: Interest Rate, Banking Performance, Stock

The Information Effect of Monetary Policy: Self-Defeating or Optimal?

As the Federal Reserve has become more transparent about its decisions on the federal funds target rate, the general public has begun to regard the rate as not only a benchmark interest rate, but also as a signal about the state of the economy. However, the specific information considered by the public to be revealed is not clearly understood. We investigate this question and find that the information revealed by monetary policy decisions is regarding future output growth, not inflation, and that such an information effect is theoretically optimal and does not make interest-rate policies self-defeating.

Baja tasa de referencia y crédito barato

El objetivo de la investigación es resaltar la importancia que tiene la tasa de interés de referencia interbancaria como una variable fundamental que tiene incidencia en el nivel de inversiones en una economía y; consecuentemente, que ha de impactar positivamente en el nivel de empleo. El método utilizado para la presente investigación es la revisión documental del panel de las tasas de interés de referencia que muestran los diversos bancos centrales en el mundo. Como resultado de la investigación se obtiene que las autoridades monetarias, en diversos países, gestionan la tasa de interés de referencia en épocas de crisis para animar la dinámica de la actividad económica, sobre todo la inversión que podrían realizar las empresas en esas circunstancias. Se tiene como conclusión que, la tasa de referencia o tasa de interés de referencia es el principal instrumento de política monetaria que tienen la mayoría de los bancos centrales de reserva. Si disminuye la tasa de referencia, esto haría que el banco ABC le preste dinero al banco XYZ a un menor costo; al ser la tasa más baja, habrá un incentivo para que los bancos se presten entre sí; y este dinero “más barato” se coloca vía préstamos bancarios, impulsando los emprendimientos, negocios, y la economía.

Determinan Suku Bunga dan Likuiditas Bank Terhadap Pertumbuhan Kredit di Indonesia

This study aims to determine the effect of the interest rate (BI rate) on bank credit growth in Indonesia, liquidity on bank credit growth in Indonesia and determine the effect of interest rates and liquidity on bank credit growth in Indonesia. The method used in this study is Ordinary Least Square (OLS) using secondary data from 2009 Quarter I to 2018 Quarter IV. The results of the analysis showed that there was an influence between interest rates on bank credit growth in Indonesia, there was an influence between liquidity on bank credit growth in Indonesia. Together there is an influence between interest rates and bank liquidity on the growth of bank credit in Indonesia. The policy implication of this research is that Bank Indonesia must maintain the benchmark interest rate set in order to trigger an increase in bank credit growth. In addition, Bank Indonesia must monitor the liquidity of commercial banks in Indonesia so that the trust of the banking community is even greaterKeywords : interest rate, Liquidity, Credit

TRANSMISI KEBIJAKAN MONETER DI INDONESIA

The use of the BI 7 days repo rate as a new benchmark rate replacing the BI rate, raises hopes that the transmission of monetary policy in Indonesia can run faster and more effectively. This study uses monthly time series data for the period August 2016-December 2018, using the Vector Autoregression (VAR) analysis. The results show that the transmission of monetary policy through the interest rate and asset price channels has been effective, while the transmission of monetary policy through the exchange rate channel has not been effective in driving economic growth in Indonesia. The decline in the benchmark interest rate can be responded quickly by interbank money market interest rates, banking interest rates, stock prices, and output. The exchange rate can also respond quickly to changes in interest rates, but changes in the exchange rate have not been able to influence net exports and increase output.

Libor Benchmark Reform: Recipes for Success & Disaster

Libor is arguably the world’s most important number with more than USD 350 trillion of loans and financial contracts referencing this rate. Libor benchmark interest rates are being replaced with alternative reference rates (ARRs). There is no guarantee Libor rates will continue to be quoted beyond 2021. In this paper we give an overview of Libor benchmark reforms and assess its impact on financial services. We consider the structural changes to the new ARR benchmarks and highlight litigation risks when migrating existing financial contracts referencing Libor. Finally we conclude with 3 recipes of how to implement Libor reform based on robust, last-minute and no preparation. Whilst some may find the recipes humorous it is no laughing matter. We encourage financial service providers to be well prepared for the upcoming broad-sweeping industry changes and the associated risks.

Rational Savings Account Models for Backward-Looking Interest Rate Benchmarks

Interest rate benchmarks are currently undergoing a major transition. The LIBOR benchmark is planned to be discontinued by the end of 2021 and superseded by what ISDA calls an adjusted risk-free rate (RFR). ISDA has recently announced that the LIBOR replacement will most likely be constructed from a compounded running average of RFR overnight rates over a period matching the LIBOR tenor. This new backward-looking benchmark is markedly different when compared with LIBOR. It is measurable only at the end of the term in contrast to the forward-looking LIBOR, which is measurable at the start of the term. The RFR provides a simplification because the cash flows and the discount factors may be derived from the same discounting curve, thus avoiding—on a superficial level—any multi-curve complications. We develop a new class of savings account models and derive a novel interest rate system specifically designed to facilitate a high degree of tractability for the pricing of RFR-based fixed-income instruments. The rational form of the savings account models under the risk-neutral measure enables the pricing in closed form of caplets, swaptions and futures written on the backward-looking interest rate benchmark.

Rational Savings Account Models for Backward-Looking Interest Rate Benchmarks

Interest rate benchmarks are currently undergoing a major transition. The LIBOR benchmark is planned to be discontinued by the end of 2021 and 'replaced' by what ISDA calls an adjusted risk-free rate (RFR). ISDA has recently announced that the LIBOR 'replacement' will most likely be constructed from a compounded running average of RFR overnight rates over a period matching the LIBOR tenor. This new backward-looking benchmark is markedly different when compared with LIBOR. It is measurable only at the end of the term in contrast to the forward-looking LIBOR, which is measurable at the start of the term. On the other hand though, RFRs provide a simplification because the cash flows and the discount factors may be derived from the same discounting curve, thus avoiding--on a superficial level--any multi-curve complications. We develop a new class of savings account models and derive a novel interest rate system specifically designed to facilitate a high degree of tractability for the pricing of RFR-based fixed-income instruments. The rational form of the savings account models under the risk-neutral measure enables the pricing in closed form of caplets, swaptions and futures written on the backward-looking interest rate benchmark. An interesting twist is that the proposed rational savings account models are different from so-called short rate models in that they cannot necessarily be expressed as an exponentiated integral of a short rate of interest.

THE EFFECT OF TRANSFERING ISRAEL CAPITAL CITY TO JERUSALEM TOWARD INDONESIA MACRO ECONOMY

United States President Donald Trump has just issued a controversial policy by giving Jerusalem recognition as the capital of Israel. This controversial policy triggered a strong reaction from a number of countries, especially Islamic countries including Indonesia. Indonesia through President Jokowidodo strongly condemned the policy of moving the Israeli capital to Jerusalem because it would disrupt political and security stability in the Middle East region. In the midst of the political impact caused by President Donald Trump's policies also affected the global economy. The world stock exchanges reacted immediately with the existence of these policies, one of which was the fall of the stock market index in Japan and South Korea due to investor concerns. The impact of the policies implemented by President Donald Trump also affected the Indonesian economy. This policy will affect the financial markets and capital markets in Indonesia. Trump's policy triggered an increase in the US $ exchange rate against the currencies of other countries including the Indonesian currency. Some of the negative effects on the Indonesian economy were the increase in world crude oil prices. Indonesia is currently no longer an oil exporting country, so that with the increase in world crude oil prices it will provide a fiscal burden in the State Budget (APBN). Fuel subsidies in the state budget will increase along with the increase in world crude oil prices that occur. In addition to the impact on the rupiah exchange rate against the US $, Donald Trump's policy also affects the inflation rate and the SBI interest rate. Through 2018, Bank Indonesia has raised the SBI interest rate by 150 basis points (bps) or 1.5%. The BI Governor explained that one reason for changing the benchmark interest rate was US monetary policy. The determination of high SBI interest rates also had an effect on reducing inflationary pressures. This study aims to look at the influence of President Donald Trump's policies regarding the transfer of the Israeli capital to Jerusalem against Indonesia's macroeconomic indicators. Indonesia's macroeconomic indicators are seen from 3 variables, such as the inflation rate, SBI interest rates and the rupiah exchange rate against US $ Key words : Donald Trump, inflation, SBI interest rates, exchange rates / exchange rates

South African Historical Interest Rate Volatility - Evidence of Regime- Switching

Accurate estimates of volatility are important for the valuation and risk management of financial assets. The benchmark interest rate for many assets in South Africa, the 3-month Jibar, is found to exhibit a high volatility persistence when modelled with a standard generalised autoregressive conditional heteroskedasticity (GARCH) process. The literature suggests that unobserved regime-switching in interest rate data may lead to an overestimation of volatility persistence. In this study 120 GARCH-type volatility models are tested to determine which model, conditional distribution and number of regimes best fit the data in order to extract the most accurate in-sample estimation of historical volatility for asset pricing. The data analysed consists of 877 weekly observations of 3-month Jibar in total, spanning from September 2001 to July 2018. The switching between regimes is governed by a Markov chain process which produces state-dependent transition probabilities for the unobserved regimes. The study finds that a standard single regime GARCH model may not capture the underlying volatility dynamics of the interest rate. The best performing model in this study is the 4 State Threshold-GARCH indicating that in addition to evidence of regime-switching in the data, there is an asymmetric reaction to negative information.

Effects of Macroeconomic Variables, World Gold Prices, World Oil Prices, and Dow Jones Index on Japanese Stock Index Nikkei 225

Japan is the second-largest foreign investor in Indonesia and has a Nikkei 225 stock index, which is the oldest stock index in Asia. This study aims to determine the effect of inflation, interest rates, GDP, exchange rates, world gold prices, world oil prices, and Dow Jones index on the Nikkei 225 index. This type of quantitative research with a saturated sampling method (census) is using all data. The research object for the monthly Nikkei 225 index closing price 2006-2016. Data is obtained from the Yahoo Finance website, totaling 132 months. The data analysis technique uses multiple linear regression with IBM SPSS version 23. The results of the study, inflation has no effect because the inflation experienced by Japan is below 2%, Japan's benchmark interest rate has no effect because it only changes four times, the Japanese Yen exchange rate has no effect because investors prefer to invest in Japanese Yen-based investments, Japan's GDP is influential because Japan has experienced an economic recession, world gold prices have no effect because gold as a security asset in investing stocks, world oil prices have no effect because Japan is switching to gas energy, Dow Jones index is influential because America is one of the 5 largest economic cooperation countries with Japan.

Impact of Monetary Policy on Trade Credit and Bank Credit in an Emerging Market Economies: Empirical Evidence in the Indonesia Stock Exchange

The global financial crisis of trigger Bank Indonesia to implement a monetary contraction policy by increasing the central bank's benchmark interest rate. This increase in interest rates will increase lending rates which burden creditors. Therefore creditors will shift loan from bank credit to trade credit. This study aims to analyze the effect of monetary policy on corporate credit in the form of bank credit and trade credit as an important source of financing for company profitability by using the simultaneous panel analysis method. The data used are annual data from 2015-2018 with a total cross-section of 109 companies listed on the Indonesia Stock Exchange. The results showed that the increase in interest rates as an indicator of monetary policy could increase lending on trade credit and reduce demand for lending on bank credit. This shows that the type of funding from trade credit has an important role as an alternative source of external financing when the Bank Indonesia implements a monetary contraction policy. The negative relationship between trade credit and bank credit proves that trade credit can be used instead of bank credit.

Interest rate exposure of European insurers

This paper focuses on analysing the sensitivity and behaviour of some of the leading insurers currently operating in the Euro area to changes in benchmark interest rates. The methodology used is the Quantile Regression (QR) approach and the period analysed covers from 2003 to 2015 around the recent global financial crisis. The empirical results show that European insurance market returns have a statistically significant sensitivity to interest rate variations and that there are important differences according to the period analysed, being the sensitivity most pronounced in extreme market conditions.

LIBOR and EU Securitization Changes

Two major regulatory changes will significantly affect collateralized loan obligations (CLOs): the phasing out of support for LIBOR in 2021 and the European Union Securitization Regulations, which came into effect in January 2019. These changes will affect borrowers of capital, investment managers who securitize loans, investors in CLOs, and activity of trustees in this market. As markets prepare to transition away from LIBOR, the Fed’s Alternative Reference Rates Committee has established the Secured Overnight Funding Rate (SOFR) as its recommended benchmark interest rate. A collateral manager’s transition to using SOFR may require the assistance of a trustee to navigate the change. The EU Securitization Regulation imposes new standards of transparency, risk retention, and due diligence for issuers of and investors in securitizations. The new regulation will affect issuers of securitizations in any jurisdictions that market their products to investors in the EU. With a changing market, collateral managers and trustees should be prepared with language and systems in place to manage the transitions they may face. Ensuring that all parties are informed and prepared will abate market uncertainty and provide continuity. TOPICS:CLOs, CDOs, and other structured credit, legal and regulatory issues for structured finance, financial crises and financial market history Key Findings • As markets prepare for a transition away from using LIBOR as the benchmark interest rate, the Fed’s Alternative Reference Rates Committee has established the Secured Overnight Funding Rate as its recommended alternative. A collateral manager’s transition to using SOFR could be challenging and may require the cooperation of a trustee in navigating the change. • The EU Securitization Regulation, which came into effect in January 2019, imposes new standards of transparency, risk retention, and due diligence for issuers of and investors in securitizations. The new regulation will affect issuers of securitizations in any jurisdictions that market their products to investors in the EU. • With a changing market for CLOs, collateral managers and trustees should be prepared with language and systems in place to manage the transitions they may face proactively. Ensuring that all parties are informed and prepared will help to abate market uncertainty and provide continuity.

Financial Stress Transmission from Sovereign Credit Market to Financial Market: A Multivariate FIGARCH-DCC Approach

This study examines the interdependence between the daily eurozone sovereign credit default swaps (CDS) index and four financial market sectors such as banking CDS market (CDSb), underlying sovereign market (BONDs), stock market (BMI) and future interest rate benchmark of the bunds obligation (EUROBOBL). Focusing on different phases of the sovereign debt crises, the aim of this article is to examine how the dynamics of correlations between the CDSs and financial market indicators evolved from 20 September 2011 to 12 February 2016. To this end, we adopt a dynamic conditional correlation (DCC) model into a multivariate fractionally integrated generalized ARCH (FIGARCH) framework, which accounts for long memory and time-varying correlations. The empirical findings indicate a general pattern of decrease and increase in correlations during the phases of the sovereign debt crisis, suggesting the spillover effect and different vulnerability of the CDS index and financial market indicators.

미국 통화정책이 국내 금융시장에 미치는 영향 및 자본유출입 안정화방안 (The US Monetary Policy Normalization: The Impact on Korean Financial Market and Capital Flows)

Korean Abstract: 본 연구는 글로벌 자본유출입 결정요인 및 미국 통화정책이 국내 금융시장에 미치는 영향을 분석하였다. 실증분석 결과 신흥국의 자본유출입은 주로 대외요인에 의해 영향을 받았으나, 국가별로 자본유출입 결정요인이 상당히 상이한 것으로 나타났다. 미 연준 통화정책 정상화가 국내 금융시장, 외환시장에 미치는 파급영향을 분석한 결과 미 정책금리, 기간프리미엄, 신용스프레드 등이 높아지면 국내 신용스프레드 확대 및 원/달러 환율 상승(원화 약세) 등을 초래하여다. 아울러 내국인 해외투자자금이 회수되면서 외국인 국내투자자금 이탈을 상쇄시키는 모습을 보였다. 그동안 내외금리 차 확대가 곧바로 자본유출로 이어진다는 우려가 컸다. 하지만 2014년 이후 '내국인 해외 증권투자자산 > 외국인 국내 증권투자' 구조 정착 및 내국인 해외투자자금의 환류 가능성 상승 등으로 '내외금리차 확대 → 자본유출 증가' 리스크가 과거보다 줄어들었다는 점을 시사한다. English Abstract: During the global financial crisis, the US monetary authority (Fed) reduced the benchmark interest rate to 0% and provided massive liquidity through three quantitative easing measures. As a result, the US Fed balance sheet expanded five times ($ 4.5 trillion) from September 2008 ($ 0.9 trillion). Much of the increased global liquidity flowed into emerging economies. The influx of capital contributed to the growth of emerging economies, leading to new credit increases such as bank loans. Emerging markets, which supported 63% of global GDP, served as an engine of the global economy at a time when the growth in the US and Europe were subdued. While capital inflows have a supporting role in contributing to economic growth, they have also been a potential prompting factors to systemic risk in emerging countries and Korea. Emerging economies actively responded to systemic risks from foreign capital inflows. With the introduction of macro-prudential policy measures, emerging economies have been striving to maintain an external balance by responding to the surge in domestic credit and restraining excessive capital inflows. In order for emerging countries to adopt measures to curb inflows of capital, persuasiveness and legitimacy are secured only if external influences are triggered by external factors. Most previous studies have shown that push factors have had a greater impact on capital outflows in emerging economies than in pull factors. Raghuram Rajan, former central bank governor of India, has pointed out that the monetary policy impact of the US Fed and the developed country central bank is a major external factor (push factor). Meanwhile, in May 2018, the US Federal Reserve Chairman Jerome Powell addressed the controversy over capital movements to emerging economies after the global financial crisis. Powell said the inflows of capital into emerging economies is unlikely to have been caused by the Fed’s interest rate policy. According to the study, the US Fed’s quantitative easing has had the effect of lowering the Fed base rate by a further 4%. This means that normalization of the quantitative easing policy will lead to a policy rate hike of 4 percentage points. This is the reason why the normalization of US monetary policy will have a negative impact on the global economy. At the same time, the squeezing on capital outflows in emerging economies is increasing. Powell’s speech contains “implied” warnings that the US monetary policy is not a triggering force of a capital outflow in emerging economies. That’s why Powell’s speech is adding to the difficulty of policy responses in emerging countries. This suggests that it is necessary to check the determinants of global capital flows. In addition, the impact of US monetary policy on Korea's financial markets and capital outflows needs to be analyzed in depth.

ANALISIS SUKU BUNGA, INFLASI DAN KREDIT MACET MODAL KERJA DI INDONESIA

This study aims to determine the effect of reference interest rates on inflation and bad credit working capital and also see how the effect of inflation on bad credit working capital in Indonesia. The type of research used is descriptive and associative research, namely research that describes the research variable and finds the presence or absence of influence between the independent variable and the dependent variable. The type of data in this study are quantitative secondary data and time series from 2016M6-2018M11 with documentation data collection techniques sourced from Bank Indonesia (BI), Financial Services Authority (OJK), Central Statistics Agency (BPS), and other library studies . Data were analyzed using multiple linear regression models with steps: (1) classical assumptions, (2) hypothesis testing, and (3) test coefficient of determination (R2). The results of this study indicate that: (1) The benchmark interest rate has a negative and significant relationship to inflation. (2) The reference interest rate has a positive and significant relationship to non-performing loans of working capital in Indonesia. (3) Inflation has a non-significant and negative relationship to non-performing loans of working capital in Indonesia. This study aims to determine the effect of reference interest rates on inflation and bad credit working capital and also see how the effect of inflation on bad credit working capital in Indonesia. The type of research used is descriptive and associative research, namely research that describes the research variable and finds the presence or absence of influence between the independent variable and the dependent variable. The type of data in this study are quantitative secondary data and time series from 2016M6-2018M11 with documentation data collection techniques sourced from Bank Indonesia (BI), Financial Services Authority (OJK), Central Statistics Agency (BPS), and other library studies . Data were analyzed using multiple linear regression models with steps: (1) classical assumptions, (2) hypothesis testing, and (3) test coefficient of determination (R2). The results of this study indicate that: (1) The benchmark interest rate has a negative and significant relationship to inflation. (2) The reference interest rate has a positive and significant relationship to non-performing loans of working capital in Indonesia. (3) Inflation has a non-significant and negative relationship to non-performing loans of working capital in Indonesia. <w:LsdException Locked="false" Priority="40" Name="Grid

THE MACROECONOMIC SURPRISE EFFECTS ON LQ45 STOCK RETURN VOLATILITY

Surprise macroeconomic news causes high volatility in stock market return to the stock market becomes riskier. This study aims to analyze the effects of surprise from the announcement of the United States (US) and domestic macroeconomic news on the LQ45 stock returns volatility. There are 25 stocks chosen because consistently in LQ45 during the 2013 - 2018 research period. The Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model is used to analyze the volatility of returns for each stock. The analysis shows that negative surprise from the Bank Indonesia benchmark interest rate, positive surprise from Indonesia’s trade balance, positive surprise from Consumer Price Index US, and positive surprise from ISM Manufacturing US have a significant effect in reducing volatility return and making most LQ45 Stocks return more stable and less risky. Other macroeconomic surprises show different directions of influence. Finally, this study also provides recommendations for the investor to choose stocks according to their respective risk profiles. The risk averse investor can invest in PT Astra International Tbk (ASII), PT Lippo Karawaci Tbk (LPKR) and PT AKR Corporindo Tbk (AKRA) which have low volatility during the release of surprise macroeconomic, while the risk taker investor can invest to PT Astra Agro Lestari Tbk (AALI), PT Vale Indonesia Tbk (INCO), and PT. Media Nusantara Citra Tbk (MNCN) which respond to many surprises of macroeconomic news.