Interest Rate Fluctuations Research Articles

Interest rate uncertainty and sovereign default risk

Empirical studies suggest that fluctuations in the level and volatility of the world interest rate affect sovereign spreads in emerging economies. We incorporate an estimated time-varying process for the world interest rate (with both level and volatility shocks) into a model of sovereign default calibrated to a panel of emerging economies. Time variation in the world interest rate interacts with default incentives in the model and leads to state contingent effects similar to the empirical literature. On average, in response to a rise in the world interest rate the model delivers a 1.4 times increase in the spread. The volatility state has a major impact on this average – the increase in spreads is much larger in high volatility states. Moreover, we show that fluctuations in the world interest rate can generate considerable co-movement in sovereign yields across nations, as seen in the data.

Correlation Financial Option Pricing Model and Computer Simulation under a Stochastic Interest Rate

With the continuous expansion of the consumer interest rate market today, the risks brought by interest rate fluctuations have had a huge and far-reaching impact on the financial markets of many countries and it is becoming more and more important to simulate the pricing of financial options. In the traditional pricing model of financial options, the pricing standard of the pricing model is generally set as a financial product with random disturbance characteristics and the market price of its transaction does not follow the arbitrage principle of financial product pricing. It is easy to generate errors and cause risks, and the accuracy of traditional financial option pricing models is not high, and the simulation time is long, which greatly reduces the rate of financial transactions. To improve the accuracy of option pricing models, this paper uses computer simulation technology to simulate the pricing of correlated financial options under stochastic interest rates. From the four aspects of error, risk parameters, success rate, and simulation time, it is tested to observe the influence of computer simulation technology on the financial option pricing model. The final results show that by using computer simulation technology, the error of the correlation financial option pricing model under the random interest rate is reduced, the success rate is improved, the risk parameter is reduced by 3.03%, and the simulation time is reduced by 0.605 seconds.

Optimal Operation of an Integrated Hybrid Renewable Energy System with Demand-Side Management in a Rural Context

A significant portion of the Indian population lives in villages, some of which are located in grid-disconnected remote areas. The supply of electricity to these villages is not feasible or cost-effective, but an autonomous integrated hybrid renewable energy system (IHRES) could be a viable alternative. Hence, this study proposed using available renewable energy resources in the study area to provide electricity and freshwater access for five un-electrified grid-disconnected villages in the Odisha state of India. This study concentrated on three different kinds of battery technologies such as lithium-ion (Li-Ion), nickel-iron (Ni-Fe), and lead-acid (LA) along with a diesel generator to maintain an uninterrupted power supply. Six different configurations with two dispatch strategies such as load following (LF) and cycle charging (CC) were modelled using nine metaheuristic algorithms to achieve an optimally configured IHRES in the MATLAB© environment. Initially, these six configurations with LF and CC strategies were evaluated with the load demands of a low-efficiency appliance usage-based scenario, i.e., without demand-side management (DSM). Later, the optimal configuration obtained from the low-efficiency appliance usage-based scenario was further evaluated with LF and CC strategies using the load demands of medium and high-efficiency appliance usage-based scenarios, i.e., with DSM. The results showed that the Ni-Fe battery-based IHRES with LF strategy using the high-efficiency appliance usage-based scenario had a lower life cycle cost of USD 522,945 as compared to other battery-based IHRESs with LF and CC strategies, as well as other efficiency-based scenarios. As compared to the other algorithms used in the study, the suggested Salp Swarm Algorithm demonstrated its fast convergence and robustness effectiveness in determining the global best optimum values. Finally, the sensitivity analysis was performed for the proposed configuration using variable input parameters such as biomass collection rate, interest rate, and diesel prices. The interest rate fluctuations were found to have a substantial impact on the system’s performance.

An Analysis of the Interest Rate Risk of the Federal Reserve’s Balance Sheet, Part 2: Projections under Alternative Interest Rate Paths

As discussed in the first note of this two-note series, net income of the Federal Reserve (Fed) and its remittances to the U.S. Treasury along with the unrealized gain or loss position of the System Open Market Account (SOMA) portfolio are affected by fluctuations in interest rates. The need for the Fed to increase the policy rate expeditiously to address the inflationary pressures is projected to result in the Fed's net income turning negative temporarily.

Performance Evaluation Method of Online Supply Chain Finance Logistics Enterprises Based on GARCH-VAR

In recent years, China’s core enterprises have been plagued by high operating costs, difficult bank loans, and other practical problems in the supply chain. As a new financing model emerged in recent years, it has opened up new markets in finance and logistics industry and brought new ideas and vitality to all parties in the supply chain. Since the strengthening of supervision, the operation of the industry has gradually changed to the direction of normalization. The study of online loan interest rate fluctuation is helpful to understand the source and characteristics of online loan risk, which has important reference significance for China’s Internet lending market. The measurement of interest rate risk can help to monitor market risk in time and improve financial supervision. This paper takes the online loan interest rate under the background of supervision as the research object, combining theoretical analysis and empirical research to explore the characteristics of interest rate fluctuations and the reasons behind the P2P online loan, and discusses the online loan business model. Based on the influencing factors of interest rate fluctuation, this paper analyzes the main characteristics of network loan interest rate from the aspects of interest rate trend interval distribution, regional distribution, and background distribution. This paper adopts the daily closing price data of domestic R insurance company to establish the daily logarithmic return rate series of stock prices. The results show that (1) GARCH-VAR model can effectively reflect the stock price fluctuation and market risk degree of the insurance company; (2) the company’s VAR showed a trend of first rise and then slight decline, with the highest VAR in 2018; and (3) the interpretation of VAR value should be combined with financial indicators. The increase in net profit rate will also lead to the decline of VAR value in the next period. Based on this, countermeasures and suggestions for market risk management are proposed for insurance companies.

Government Domestic Borrowing and Private Credit in Nigeria: Testing the Lazy Bank Hypothesis

This study investigates the effect of government public domestic borrowing on credit to the private sector in applying the lazy bank model in Nigeria. The study utilises the Central Bank of Nigeria data covering the period between 1980 and 2019 and deploys the Autoregressive distributed lag (ARDL) model for analysis. The study results show that domestic government borrowing has the most dominant effect on credit to the private sector in a negative and significant impact. Also, the effect of interest rate and inflation are negative and significant on the credit to the private sector. However, the effect of real GDP on credit to the private sector is minimal and positive. The strong negative effect of domestic government borrowing confirms the application of the lazy bank hypothesis in Nigeria. In addition, the negative effect of interest rate suggests that the crowding-out hypothesis applies in Nigeria. Therefore, the study recommends that the government reduces borrowing from the banking sector and implement coordinated macroeconomic policies to minimise the adverse fluctuations in interest rate and inflation while taking concrete steps to ensure that more credit is available to the private sector. Keywords: Government Domestic Borrowing, Credit to the Private Sector, Domestic Financial Markets, Lazy Banks, Crowding Out. JEL Codes: E52, H63, G21 DOI: 10.7176/JESD/13-7-07 Publication date: April 30 th 2022

Impact of Macroeconomic Variables on Foreign Direct Investments in Nigeria

This study examines the impact of macroeconomic variables on foreign direct investment in Nigeria from the period of 1985-2020. Autoregressive Distributed Lag (ARDL) and Granger causality tests were employed. The result from ARDL shows that foreign direct investments are majorly determined by the real gross domestic product, exchange rate, interest rate and degree of openness. The Granger causality test indicates evidence of unidirectional causation which flows from exchange rate, inflation rate and degree of openness to foreign direct investment while no evidence of causality was found among other variables. Based on this, the study recommends that policymakers should put in high esteem economic growth and development in the country and this should be corroborated by a consistent exchange rate to increase investors’ confidence through a healthy and secured exchange rate management. Interest rate fluctuation should be curtailed by the monetary policy. Keywords: Foreign Direct Investments, Exchange Rate, Inflation Rate, Degree of Openness DOI: 10.7176/JESD/13-8-03 Publication date: April 30 th 2022

Is the Impact of COVID-19 Significant in Determining Equity Market Integration? Insights from BRICS Economies

This article examined the impact of the unanticipated outbreak of global public health crisis, COVID-19 pandemic, on the equity market performances and on the degree of integration of these markets in BRICS bloc. The empirical analyses lend support to the weakened equity market integration in the BRICS economies amid the pandemic, and the key driving forces include the rate of inflation, the real rate of interest, real exchange rate and composite leading indicator in the long-run, and trade performance and composite leading indicator in the short-run. The implications on the one hand, indicate increased opportunities for international portfolio diversification, and on the other hand, suggest for controlling the macroeconomic uncertainties of inflation, interest rate and exchange rate fluctuations during global health crisis to promote stable economic conditions for ensuring equity market integration in the long-run.

Optimal Asset Allocation Subject to Withdrawal Risk and Solvency Constraints

This paper investigates the optimal asset allocation of a financial institution whose customers are free to withdraw their capital-guaranteed financial contracts at any time. In accounting for the asset-liability mismatch risk of the institution, we present a general utility optimization problem in a discrete-time setting and provide a dynamic programming principle for the optimal investment strategies. Furthermore, we consider an explicit context, including liquidity risk, interest rate, and credit intensity fluctuations, and show by numerical results that the optimal strategy improves both the solvency and asset returns of the institution compared to a standard institutional investor’s asset allocation.

Optimal Asset Allocation for CRRA and CARA Insurers under the Vasicek Interest Rate Model

This paper considers the reinsurance‐investment problem with interest rate risks under constant relative risk aversion and constant absolute risk aversion preferences, respectively. Stochastic control theory and dynamic programming principle are applied to investigate the optimal proportional reinsurance‐investment strategy for an insurer under the Vasicek stochastic interest rate model. Solving the corresponding Hamilton‐Jacobi‐Bellman equation via the Legendre transform approach, the optimal premium allocation strategies maximizing the expected utilities of terminal wealth are derived. In addition, several sensitivity analyses and numerical illustrations are given to analyze the impacts of different risk preferences and interest rate fluctuation on the optimal strategies. We find that the asset allocation and reinsurance ratio of the insurer are correlated with risk preference coefficient and interest rate fluctuation, and the insurance company may adjust the reinsurance‐investment strategy to deal with interest rate risk.

АНАЛІЗ РОЗРИВІВ ЛІКВІДНОСТІ ЯК МЕТОД ЗБАЛАНСОВАНОГО УПРАВЛІННЯ АКТИВАМИ ТА ПАСИВАМИ (НА ПРИКЛАДІ АТ «КБ «ПРИВАТБАНК»)

In the article it was explored the concept of asset and liability management. It was found that this process has a direct impact on the structure and liquidity of the bank's balance sheet, as well as sensitivity to fluctuations in interest rates on its financial items. Liquidity management is a priority in the bank's asset and liability management. It was justified that the best method of assessing the risk of liquidity loss is to analyze the gap in the maturity of financial requirements and liabilities. The basis of liquidity management is the concept of cash flow compliance, aimed at ensuring that based on the GAP-analysis of incoming cash flows are brought in line with the outgoing flows. It was revealed that an important system-forming institution of the domestic banking sphere is JSC CB «PrivatBank». From the point of view of asset and liability management, the main sources of mobilization of financial resources of this bank were be identified. It was found that due to the active work of JSC CB «PrivatBank» in the Ukrainian financial market, the greatest danger is the probability of liquidity risk. The emergence of this risk means that the institution may suffer losses, additional expenses or loss of income due to its inability to provide financing to increase assets and/or fulfillment of its liabilities in due time. In this context the GAP-analysis was performed for JSC CB «PrivatBank». For the purpose of liquidity gap analysis there were selected only financial assets and liabilities of the bank. All these funds were divided into following groups: on demand and up to 1 month, from 1 to 3 months, from 3 to 12 months, more than 12 months. It was made an assessment of the dynamics of changes in liquidity gaps in JSC CB «PrivatBank» in terms of maturity, as well as the total liquidity gap in 2016-2020. The necessity of developing measures to maintain liquidity in case of adverse events was substantiated. There were offered variants of scenarios of response to realization of bank liquidity risks. Emphasis was placed on the importance of finding alternative sources of funding that increase the bank's ability to withstand stressful situations and liquidity crises.

Model risk in mortality-linked contingent claims pricing

Pricing mortality-linked contingent claims depends critically on the ability to accurately model three core stochastic components: expected mortality rates and life expectancy by age group, for a given population; interest rate dynamics over various time horizons; and the causal relationship between mortality events and interest rate fluctuations. In each of these components, there is potential for model misspecification that manifests as model risk and may result in mispricing. We study the influence of model risk on pricing life products, including annuity portfolios and guaranteed annuity options. We demonstrate that classical Lee–Carter-type models can produce less accurate model forecasts than our proposed multivariate long-memory models and we quantify the mispricing cost of this model risk.

The effect of reverse factoring financial changes on supply chain

The consequences of reverse factoring in a supply chain are examined in this article. Reverse factoring occurs when a buying firm offers a reduced short-term borrowing rate to a supplier company in exchange for longer payment terms. From the standpoint of a supplier, this paper investigates the impact of rating changes, interest rate fluctuations, and business cycle position on the cost-benefit trade-off in the SMEs and manufacturing companies. However, the data was collected using a questionnaire. The main result is that changes in critical financial variables like ratings, news alerts and interest rates will shift former win–win circumstances for the supplier dependent on the business cycle into win–lose situations for the supplier. Overall, the reverse factoring results reveal sophisticated trade-offs, necessitating careful consideration in managerial decisions.

Individual Investors' Housing Income and Interest Rates Fluctuations

Individual Investors' Housing Income and Interest Rates Fluctuations

Efekat akvizicije na poboljšanje performansi kompanije

Today, external factors are increasingly influencing companies and financial management. Intense competition among corporations, technological change, fluctuations in inflation and interest rates, global economic uncertainty, fluctuating exchange rates, changes in tax laws and ethical concerns about certain financial affairs, are everyday phenomena that need to be addressed. It is this previously mentioned intense competition between companies that leads to various forms of financial restructuring. One of the most common types of financial restructuring is an acqusition, which will be the subject of this paper. There are different types of corporate restructuring of the company, which include, organizational, financial, ownership, etc. And as already mentioned, one of the main organizational types of restructuring is acquisition. The aim of this paper is to see the effect of acquisition on the company's business through the basic ratio analysis of indicators before and after the acquisition of companies and to see the synergetic effect of the acquisition and projected expected future financial results of the company.

Derivatives Market: A Strategic Financial Tool in Locking Future Prices

Financial globalization also paved way with numerous innovative financial services, products, instruments, investing wisely, minimizing risk on one hand and maximizing returns on other hand. India being a developed economy in recent years, opened market for financial investments and allowed prices to vary with the prevailing market conditions. The corporate sector has grown manifolds in the 21st century, with the rise in banking, industry, advancement of technology, which made financial market prices fluctuating without any proper estimation for future. This made corporate world to depend on the financial instruments which can predict the future price of an instrument, so as to avoid the future risk. Answer to all the above issues of corporate sector, is given by “Derivatives” which derive some future value of its “underlying asset”. These derivatives provide an effective estimation of future price, which can solve the problem of risk and uncertainty due to fluctuation of interest rates, exchange rates, stock market prices and any other underlying assets.

The time-varying bond risk premia in China

Unlike many developed countries in which zero interest rate policies are widely adopted, there is still room for interest rate fluctuations in China. Nevertheless, the dynamics of bond yields, forward rates and risk premia still differ from the traditional understanding. This paper focuses on the Chinese treasury bonds. By OLS regressions, we find movements in the current forward rate fully reflect future bond risk premia, while other variables do not improve its performances, regardless of in- and out-of-sample predictions. This result is confirmed by a group of no-arbitrage dynamic term structure models. Moreover, the theoretical models reveal three important findings: 1. there are about 20% predictable variations in annual excess returns; 2. only the level factor risk is priced; 3. the candidate macroeconomic variables cannot contribute to the term premia structure.

Economic Interactions among Stock Market Performance and Macroeconomic Variables with Mediating Role of Gold Prices Volatilities: An Evidence from Pakistan

In all emerging economies, one of the most challenging issues for investors is the multifaceted inter-relationship between volatility of gold prices and stock market index. During the COVID-19 sub-periods, gold has shown a strong hedging behavior against stock market performance. The main objective of this study was to quantify the long-run relationship among multiple independent macroeconomic variables (predictors) on stock market index (response variable) using the volatilities of gold prices as a mediator factor. This study applied the descriptive statistics, correlation, t-test and OLS multiple regression Model. The specific data comprised of period 2011-2020 regarding the fluctuations in gold prices, exchange rate, interest rate, inflation rate and performance of stock market index has been utilized. The statistical outputs of models showed that exchange rate (Dollar to PKR) was positively affecting the performance of Karachi Stock Exchange (KSE)-100 Index, whereas inflation rate and interest rate were negatively affecting the overall performance of KSE100 index. The findings of this study suggested that to achieve better performance of stock market, relatively low interest rate and inflation rate contribute a significant role. However, to increase the generalization capabilities of this study the impact of mentioned macroeconomic variables in other sectors like industrial production, oil & gas and energy sectors with wider time span can be more helpful.

An Investor’s Investment Plan with Stochastic Interest Rate under the CEV Model and the Ornstein-Uhlenbeck Process

The aim of this paper is to maximize an investor’s terminal wealth which exhibits constant relative risk aversion (CRRA). Considering the fluctuating nature of the stock market price, it is imperative for investors to study and develop an effective investment plan that considers the volatility of the stock market price and the fluctuation in interest rate. To achieve this, the optimal investment plan for an investor with logarithm utility under constant elasticity of variance (CEV) model in the presence of stochastic interest rate is considered. Also, a portfolio with one risk free asset and two risky assets is considered where the risk free interest rate follows the Ornstein-Uhlenbeck (O-U) process and the two risky assets follow the CEV process. Using the Legendre transformation and dual theory with asymptotic expansion technique, closed form solutions of the optimal investment plans are obtained. Furthermore, the impacts of some sensitive parameters on the optimal investment plans are analyzed numerically. We observed that the optimal investment plan for the three assets give a fluctuation effect, showing that the investor’s behaviour in his investment pattern changes at different time intervals due to some information available in the financial market such as the fluctuations in the risk free interest rate occasioned by the O-U process, appreciation rates of the risky assets prices and the volatility of the stock market price due to changes in the elasticity parameters. Also, the optimal investment plans for the risky assets are directly proportional to the elasticity parameters and inversely proportional to the risk free interest rate and does not depend on the risk averse coefficient.

Identification and Prioritization of Critical Risk Factors of Commercial and Recreational Complex Building Projects: A Delphi Study Using the TOPSIS Method

Construction development of Commercial and Recreational Complex Building Projects (CRCBPs) is one of the community needs of many developing countries. Since the implementation of these projects is usually very costly, identifying and evaluating their Critical Risk Factors (CRFs) are of significant importance. Therefore, the current study aims to identify and prioritize CRFs of CRCBPs in the Iranian context. A descriptive-survey method was used in this research; the statistical population, selected based on the purposive sampling method, includes 30 construction experts with hands-on experience in CRCBPs. A questionnaire related to the risk identification stage was developed based on a detailed study of the research literature and also using the Delphi survey method; 82 various risks were finally identified. In order to confirm the opinions of experts in identifying the potential risks, Kendall’s coefficient of concordance was used. In the first stage of data analysis, qualitative evaluation was performed by calculating the severity of risk effect and determining the cumulative risk index, based on which 25 CRFs of CRCBPs were identified for more accurate evaluation. At this stage, the identified CRFs were evaluated based on multi-criteria decision-making techniques and using the TOPSIS technique. Results show that the ten CRFs of CRCBPs are external threats from international relations, exchange rate changes, bank interest rate fluctuations, traffic licenses, access to skilled labor, changes in regional regulations, the condition of adjacent buildings, fluctuations and changes in inflation, failure to select a suitable and qualified consultant, and employer’s previous experiences and records. Obviously, the current study’s results and findings can be considered by CRCBPs in both the private and public sectors for proper effective risk identification, evaluation, and mitigation.