Term Structure Of Interest Rates Research Articles

(Un)expected monetary policy shocks and term premia

SummaryThe term structure of interest rates is crucial for the transmission of monetary policy to financial markets and the macroeconomy. Disentangling the impact of monetary policy on the components of interest rates, expected short rates, and term premia is essential to understanding this channel. To accomplish this, we provide a quantitative structural model with endogenous, time‐varying term premia that are consistent with empirical findings. News about future policy, in contrast to unexpected policy shocks, has quantitatively significant effects on term premia along the entire term structure. This provides a plausible explanation for partly contradictory estimates in the empirical literature.

Monetary policy and market interest rates: literature review using text analysis

PurposeThis paper aims to examine the relationship between monetary policy and market interest rates. This paper examines the efficiency of interest rate channel used in monetary regulation as well as implementation of monetary policy under low interest rates. This paper examines and reviews the scientific literature published over the past 30 years to determine primary research areas, to summarize their results and to identify appropriate measures of monetary policy to be used in practice in changing economic environment.Design/methodology/approachThis paper reviews 94 studies focused on the relationship between monetary policy and market interest rates in terms of meeting the goals of macroeconomic regulation. The articles are selected on the basis of Scopus citation and bibliometric analysis. A major feature of this paper is the use of text analysis (data preparation, frequency of terms and collocations use, examination of relationships between terms, use of principal component analysis to determine research thematic areas). Using the method of principal component analysis while studying abstracts this paper reveals thematic areas of the research. Thus, the conducted text analysis provides unbiased results.FindingsFirst, this paper examines the whole complex of relationships between monetary policy of central banks and market interest rates. Second, this research reviews a wide range of literature including recent studies focused on specific features of monetary policy under low and negative rates. Third, this study identifies and summarizes the thematic areas of all the researches using text analysis (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability). Finally, this paper presents the most important findings of the studied articles related to the current situation and trends on the financial market as well as further research opportunities. This paper finds the principal results of studies on significant issues of monetary policy in terms of its efficiency under low interest rates, influence of its instruments on term structure of interest rates and role of banking sector in implementation of transmission mechanism of monetary policy.Research limitations/implicationsThe limitation of the review is examining articles for the study period of 30 years.Practical implicationsCentral banks of emerging economies should apply the instruments and results of the countries' monetary policies reviewed in this paper. Using text analysis this paper reveals the main thematic areas and summarizes findings of the articles under study. The analysis allows presenting the main ideas related to current economic situation.Social implicationsThe findings are of great value for adjusting the monetary policy of central banks. Also, these are important for people because these show the significant role of monetary policy for the economic growth.Originality/valueUsing text analysis this paper reveals the main thematic areas (transmission mechanism of monetary policy, efficiency of zero interest rate policy, monetary policy and term structure of interest rates, monetary policy and interest rate risk of banks, monetary policy of central banks and financial stability) and summarizes findings of the articles under study. The analysis allows defining the current ideas relevant to the monetary policy of developing countries. It is important for central banks because it examines the monetary policy problems and proposes optimal solutions.

Model-free nonparametric bounds for zero-coupon interest rates in bond markets without the no arbitrage principle

ABSTRACT Real-world market quotes of bonds can sometimes contradict the no arbitrage principle within the discounted cash flow model. This makes some kinds of no-arbitrage-based analyses impossible, e.g., inferring the bounds for the term structure of interest rates. Instead of using a more sophisticated model to account for pricing peculiarities, we propose a replacement for the no arbitrage principle. While being theoretically plausible, it does not get contradicted by the data – thus, we can infer the same kind of term structure bounds from it, even given the contradictions with the no arbitrage principle. Using a dataset of Russian sovereign bond quotes, we show that the no arbitrage inconsistency problem arises in 10–20% of cases and that the proposed approach successfully overcomes it.

Sustainable Construction and Financing—Asset-Backed Securitization of Expressway’s Usufruct with Redeemable Rights

Asset-backed securitization will greatly promote the sustainability of infrastructure construction and financing. However, there are quite limited researches conducted in this field. Given the project characteristics of infrastructure project securities, this paper proposes the issuance steps of redeemable asset-backed notes (ABN) based on the infrastructure project’s usufruct as the basic asset. Taking the expressway franchise as an example, the issuing scale and coupon rate of the redeemable ABN are determined by the expected cash flow of the expressway, the term structure of random interest rates, and the option-adjusted spread (OAS). In addition, this research analyzes the duration, convexity, and OAS.

Dynamic spillovers between the term structure of interest rates, bitcoin, and safe-haven currencies

This study examines the connectedness between the US yield curve components (i.e., level, slope, and curvature), exchange rates, and the historical volatility of the exchange rates of the main safe-haven fiat currencies (Canada, Switzerland, EURO, Japan, and the UK) and the leading cryptocurrency, the Bitcoin. Results of the static analysis show that the level and slope of the yield curve are net transmitters of shocks to both the exchange rate and its volatility. The exchange rate of the Euro and the volatility of the Euro and the Canadian dollar exchange rate are net transmitters of shocks. Meanwhile, the curvature of the yield curve and the Japanese Yen, Swiss Franc, and British Pound act mainly as net receivers. Our static connectedness analysis shows that Bitcoin is mainly independent of shocks from the yield curve’s level, slope, and curvature, and from any main currency investigated. These findings hint that Bitcoin might provide hedging benefits. However, similar to the static analysis, our dynamic analysis shows that during different periods and particularly in stressful times, Bitcoin is far from being isolated from other currencies or the yield curve components. The dynamic analysis allows us to observe Bitcoin’s connectedness in times of stress. Evidence supporting this contention is the substantially increased connectedness due to policy shocks, political uncertainty, and systemic crisis, implying no empirical support for Bitcoin’s safe-haven property during stress times. The increased connectedness in the dynamic analysis compared with the static approach implies that in normal times and especially in stressful times, Bitcoin has the property of a diversifier. The results may have important implications for investors and policymakers regarding their risk monitoring and their assets allocation and investment strategies.

Estimating the Interest Rate Term Structures of Treasury and Corporate Debt with Bayesian Penalized Splines

This paper provides a Bayesian approach to estimating the interest rate term structures of Treasury and corporate debt with a penalized spline model. Although the literature on term structure modeling is vast, to the best of our knowledge, all methods developed so far belong to the frequentist school. In this paper, we develop a two-step estimation procedure from a Bayesian perspective. The Treasury term structure is first estimated with a Bayesian penalized spline model. The smoothing parameter is naturally embedded in the model as a ratio of posterior variances and does not need to be selected as in the frequentist approach. The corporate term structure is then estimated by adding a credit spread to the estimated Treasury term structure, incorporating knowledge of the positive credit spread into the Bayesian model as an informative prior. In contrast to the frequentist method, the small sample size of the corporate debt poses no particular difficulty to the proposed Bayesian approach.

A Robust Approach to the Interest Rate Term Structure Estimation

This paper estimates the interest rate term structures of Treasury and individual corporate bonds using a robust criterion. The Treasury term structure is estimated with Bayesian regression splines based on nonlinear least absolute deviation. The number and locations of the knots in the regression splines are adaptively chosen using the reversible jump Markov chain Monte Carlo method. Due to the small sample size, the individual corporate term structure is estimated by adding a positive parametric credit spread to the estimated Treasury term structure using a Bayesian approach. We present a case study of U.S. Treasury STRIPS (Separate Trading of Registered Interest and Principal of Securities) and AT&T bonds from April 1994 to December 1996. Compared with several existing term structure estimation approaches, the proposed method is robust to outliers in our case study.

No‐arbitrage priors, drifting volatilities, and the term structure of interest rates

AbstractWe use a Bayesian vector autoregression with stochastic volatility to forecast government bond yields. We form the conjugate prior from a no‐arbitrage affine term structure model. The model improves on the accuracy of point and density forecasts from a no‐change random walk and an affine term structure model with stochastic volatility. Our proposed approach may succeed by relaxing the no‐arbitrage affine term structure model's requirements that yields obey a factor structure and that the factors follow a Markov process. In the term structure model, its cross‐equation no‐arbitrage restrictions on the factor loadings appear to play a marginal role in forecasting gains.

Model uncertainty on commodity portfolios, the role of convenience yield

This paper investigates the effect of model uncertainty on the performance of commodity-based portfolios. We consider a constant relative risk aversion (CRRA) utility maximizer investor in a complete market, with independent ambiguity-aversion levels for the three factors explaining the term structure of future prices, namely, spot prices, convenience yield (CY) and interest rates (IRs), as proposed in the seminal work of Schwartz (J Finance 52(3): 923–973, 1997). This generic investor is interested in the speculative component of the investment rather than possessing/consuming the physical commodity. We obtain closed-form solutions for optimal investments, optimal perturbations (alternative model) and value functions in line with the robust portfolio setting of Maenhout (Rev Financial Stud 17(4): 951–983, 2004). Our main focus is on the effect of convenience yield’s uncertainty on the optimal analysis. We estimate the model by applying a combination of maximum likelihood estimation (MLE) and Kalman Filter (KF) techniques, to two commodities: West Texas Intermediate (WTI) and copper future prices. The analysis demonstrates that uncertainty on the CY factor could be the largest contributor to the under-performance of a commodities portfolio, with wealth equivalent losses (WELs) in the ranges of 33% to 88% (WTI), and 7% to 31% (copper). Moreover, small variations, of up 25%, on CY’s covariance parameters could lead to a WEL of up to 40% (WTI, lesser volatility of CY).

A Comparative Analysis of the Expectations Hypothesis of the Term Structure of Interest Rates between the BRICS and G7 Countries

This paper examines the predictive ability of the expectations hypothesis of the term structure of interest rates in the BRICS and G7 countries by relating each country’s monthly 3‑month Treasury bill rate to 10‑year government bond rates, from May 2003 to May 2018. The panel ARDL model, applying the mean group (MG), pooled mean group (PMG), and dynamic fixed effects (DFE) estimators, is employed to compare the short‑ and long‑run relationships in both groups of countries. The results show that the expectations hypothesis holds in both BRICS and G7 country groups. In the long run, the short‑term interest rate is able to predict the long-term interest rate in both the BRICS and G7 countries. Interest rates in BRICS indicate rapid adjustment back to the long‑run equilibrium, while the adjustment is sluggish in the G7 block. Based on the findings of the study, the sluggish adjustment to the equilibrium in the G7 gives the impression that the financial crisis had an impact on the term structure of interest rates as the G7 countries were directly affected by the crisis.

The Hull–White model under volatility uncertainty

We study the Hull–White model for the term structure of interest rates in the presence of volatility uncertainty. The uncertainty about the volatility is represented by a set of beliefs, which naturally leads to a sublinear expectation and a G-Brownian motion. The main question in this setting is how to find an arbitrage-free term structure. This question is crucial, since we can show that the classical approach, martingale modeling, does not work in the presence of volatility uncertainty. Therefore, we need to adjust the model in order to find an arbitrage-free term structure. The resulting term structure is affine with respect to the short rate and the adjustment factor. Although the adjustment changes the structure of the model, it is still consistent with the traditional Hull–White model after fitting the yield curve. In addition, we extend the model and the results to a multifactor version, driven by multiple risk factors.

MARKET TIMING ABILITIES OF LARGE-CAP EQUITY MUTUAL FUND MANAGERS: EVIDENCE FROM INDIA

This study investigates the Market Timing Ability (MTA) of large-cap equity fund managers in India. The extensions of Treynor and Mazuy (TM) model and Henriksson and Merton (HM) model have been used by adding six additional factors related to the public information, 91-days Treasury bill’s yield, the dividend yield on CNX 500 index, term structure of interest rates, the price-to-earnings ratio, yield from foreign exchange rates changes, and growth rate in gold prices. The extended models are termed, conditional models. This study has used time-series data of large-cap equity funds. The results of the conditional and unconditional versions of TM and HM models reveal that the large-cap equity funds as a whole do not possess significant MTA, even though a considerable percentage of the funds under each of the models show significant positive MTA. The study also highlights that the inclusion of the public information variables reconstitutes the impact of the market timing factor and other beta estimates in the model.

Does the slope of the yield curve of the interbank market influence prices on the Warsaw Stock Exchange? A sectoral perspective

The interest rate curve is often viewed as the leading indicator of economic prosperity in a broad sense. This paper studies the ability of the slope of the yield curve in the term structure of interest rates to impact the sectoral indices on the Warsaw Stock Exchange, using daily data covering the period from 1 January 2001 to 30 September 2020. The results of the research indicate an ambiguous dependence of the logarithmic rates of return of sub-indices on the change of the interbank interest rate curve. The only sectors showing a clear relationship of this type is energy and pharmaceuticals.

Monetary Transmission in the Term Structure of Interest Rates in Spain (1995-2003)

The aim of this paper is to investigate whether the effectiveness of the transmission mechanism of monetary policy in Spain has changed since EMU establishment. The analysis is based on the fulfillment of the Expectations Hypothesis under rational expectations and the methodology is implemented through a cointegrated bivariate VAR model. The results reveal the existence of monetary transmission in the term structure in the period prior to EMU, even though the evidence is stronger up to the one-year rate. From 1999, the results are only consistent with a weak evidence of monetary transmission.

Term spreads and the COVID-19 pandemic: Evidence from international sovereign bond markets

We explore the impact of the COVID-19 pandemic on the term structure of interest rates. Using data from developed and emerging countries, we demonstrate that the expansion of the disease significantly affects sovereign bond markets. The growth of confirmed cases significantly widens the term spreads of government bonds. The effect is independent of government policy and monetary responses to COVID-19 and robust to many considerations.

Macro Risks and the Term Structure of Interest Rates

Abstract We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Macro risks represent the variables that govern the time-varying variance, skewness, and higher-order moments of these two shocks, with ”good” (”bad”) variance associated with positive (negative) skewness. We document that macro risks significantly contribute to the variation of yields and risk premiums for nominal bonds. While overall bond risk premiums are countercyclical, an increase in aggregate demand variance significantly lowers risk premiums. Macro risks also significantly predict future realized bond return variances.

Macro risks and the term structure of interest rates

We use non-Gaussian features in U.S. macroeconomic data to identify aggregate supply and demand shocks while imposing minimal economic assumptions. Macro risks represent the variables that govern the time-varying variance, skewness, and higher-order moments of these two shocks, with ”good” (”bad”) variance associated with positive (negative) skewness. We document that macro risks significantly contribute to the variation of yields and risk premiums for nominal bonds. While overall bond risk premiums are countercyclical, an increase in aggregate demand variance significantly lowers risk premiums. Macro risks also significantly predict future realized bond return variances.

Forward start options under Heston affine jump-diffusions and stochastic interest rate

This paper presents a generalization of forward start options under jump diffusion framework of Duffie et al. [Duffie, D, J Pan and K Singleton (2000). Transform analysis and asset pricing for affine jump-diffusions, Econometrica 68, 1343–1376.]. We assume, in addition, the short-term rate is governed by the CIR dynamics introduced in Cox et al. [Cox, JC, JE Ingersoll and SA Ross (1985). A theory of term structure of interest rates, Econometrica 53, 385–408.]. The instantaneous volatilities are correlated with the dynamics of the stock price process, whereas the short-term rate is assumed to be independent of the dynamics of the price process and its volatility. The main result furnishes a semi-analytical formula for the price of the Forward Start European call option. It is derived using probabilistic approach combined with the Fourier inversion technique, as developed in Ahlip and Rutkowski [Ahlip, R and M Rutkowski (2014). Forward start foreign exchange options under Heston’s volatility and CIR interest rates, Inspired By Finance Springer, pp. 1–27], Carr and Madan [Carr, P and D Madan (1999). Option valuation using the fast Fourier transform, Journal of Computational Finance 2, 61–73, Carr, P and D Madan (2009). Saddle point methods for option pricing, Journal of Computational Finance 13, 49–61] as well as Levendorskiĩ [Levendorskiĩ, S (2012). Efficient pricing and reliable calibration in the Heston model, International Journal of Applied Finance 15, 1250050].

INTEREST RATE PREDICTABILITY IN SOME SELECTED AFRICAN COUNTRIES

This study tries to verify the predictive power of the implicit forward rate of the term structure of interest rates in Africa. We used data from Egypt, Ghana, Kenya, Nigeria and the Republic of South Africa. A modified version of the yield term premium and the forward term premium models of Shiller and McCulloch (1990) were used to test the predictive power of the implicit forward rate, rather than the rational expectations hypothesis. We both used FMOLS and DOLS estimators, since they are more consistent than OLS with non-stationary series. The overall results show that the implicit forward rate does not have a significant predictive power in Africa. It therefore appears that operators on African markets should not rely on those predictions.

Can Low Retirement Savings Be Rationalized?

Simple presentations of the life cycle model often suggest a constant level of real consumption in retirement. Similarly, financial planners commonly suggest that people save for retirement in such a way as to enable them to maintain a level retirement standard of living equal to their standard of living while working. However, constant consumption with age is only optimal under the precise and unlikely condition that the subjective rate of time preference is equal to the real interest rate. Most people exhibit a positive rate of pure time preference, and additionally discount the future by both mortality and morbidity risks. In comparison, the real interest rate is roughly 0%—and the term structure of interest rates suggests this condition is likely to persist. These considerations suggest that optimal consumption in the life cycle model declines with age. This finding has major implications for optimal retirement saving. For instance, we find that for many, perhaps most, people in the bottom half of the lifetime earnings distribution, it is optimal to spend out their retirement wealth well before death and to live on Social Security alone after that. Very low earners may find it optimal to not engage in retirement saving at all. <b>TOPICS:</b>Long-term/retirement investing, portfolio theory <b>Key Findings</b> ▪ Under plausible assumptions, optimal consumption in the life cycle model declines with age. ▪ For many people in the bottom half of the lifetime earnings distribution, it is optimal to spend out retirement wealth well before death and live on Social Security alone after that. ▪ These results stand in contrast to standard financial planning advice that people save for retirement in such a way as to enable them to maintain a level retirement standard of living equal to their standard of living while working.