Period Of Interest Rates Research Articles

With a Little Help from My Friends: Survey-Based Derivation of Euro Area Short Rate Expectations at the Effective Lower Bound

The estimation of dynamic term structure models (DTSMs) turns out to be challenging in the presence of a small sample. It is exacerbated if the sample is characterized by a prolonged period of low interest rates near a time-varying effective lower bound. These challenges all weigh heavily when estimating a DTSM for the euro area OIS yield curve. Against this background, we propose a shadow-rate term structure model (SRTSM) that includes a time-varying effective lower bound and accounts for the spread between the policy and short-term OIS rate. It also allows for future changes in the effective lower bound and incorporates survey information. The model allows to adequately assess short-term monetary policy rate expectations and it generates far-distant rate expectations that are correlated with an estimated equilibrium nominal short rate derived from a macroeconomic model set-up. Our results also highlight the signaling channel of non-standard monetary policy shocks in the run-up to asset purchases identified based on a non-linear high-frequency external instrument approach. Our model outperforms DTSM specifications without above modeling features from a statistical and economic perspective. We confirm our findings employing a Monte Carlo simulation.

IMPACT OF FINANCIAL STRUCTURE ON RETURN ON EQUITY: EVIDENCE FROM WHOLESALE OF MOTOR VEHICLE PARTS AND ACCESSORIES INDUSTRY

A widely debated topic during the last years is represented by the choice of financial structure of companies, especially in developing or emerging countries, characterized by economies without a tough and a mature financial system. The purpose of this research is to determine whether there is a relationship between capital structure and firm performance of firms active in Romania in the wholesale of motors vehicle parts and accessories (NACE 4531). Capital structure refers to how a firm chooses to finance their assets and future growth by dividing debt into subcategories (bank, commercial) and time horizon, while firm performance is evaluated by the return on equity (financial return). By determining this relationship, firms in these sectors should have a better understanding of how to select the financing for their future growth. The main output of the study consists in the fact that the financial structure divided by debt components of the companies does not influence significantly the return on equity during periods of low interest rates, like the case of Romania during 2016

King of the Mountain: The Shiller P/E and Macroeconomic Conditions

Because of mean reversion, the Shiller cyclically adjusted price/earnings (P/E) ratio is a powerful predictor of long-horizon capital market returns. Like other valuation metrics, however, it is a poor predictor of short-term returns. The authors find that this is because the “normal” level of the Shiller P/E ratio varies with economic conditions. Other researchers have shown that while periods of moderate real interest rates allow higher market valuations, P/Es tend to fall when real rates are high or low. The present authors show a similar linkage between P/Es and inflation. Moderate, rather than rock-bottom, levels of inflation and real interest rates are associated with the highest valuation multiples, creating a valuation “mountain.” The authors also extend these findings to international developed markets. They further demonstrate that the P/E ratio becomes a statistically significant and economically meaningful predictor of shorter-term returns under the assumption that P/Es mean-revert toward the levels suggested by prevailing macroeconomic conditions rather than toward long-term averages.

The impact of ECB monetary policy surprises on the German stock market

This paper examines the impact of ECB monetary policy surprises on German excess stock returns and the possible reasons for such a response. First, we conduct an event study to assess the impact of conventional and unconventional monetary policy on stock returns. Second, within the VAR framework of Campbell and Ammer (1993), we decompose excess stock returns into news regarding expected excess returns, future dividends and future real interest rates. We measure conventional monetary policy shocks using futures markets data. Our main findings are that the overall variation in German excess stock returns mainly reflects revisions in expectations about dividends and that the stock market response to monetary policy shocks is dependent on the prevailing interest rate regime. In periods of negative real interest rates, a surprise monetary tightening leads to a decrease in excess stock returns. The channels behind this response are news about higher expected excess returns and lower future dividends.

(Factors and Risks of Household Over-Indebtedness Using a New Measure Based on Conditional Quantiles)

Korean Abstract: 본고에서는 조건부 분위의 개념을 이용하여 가계의 종합적인 부채상환여건이 반영된 과다부채 가계를 정의하고 동 가계의 특징 및 리스크 요인을 분석하였다. 소득, 자산, 기대소득관련 정보, 소비여건관련 정보를 상환여건으로 활용하여 주어진 상환여건 하에서 가계부채 또는 부채비율이 상위 %인 가계를 과다부채 가계로 설정하였으며 조건부 중절분위회귀(conditional censored quantile regression) 추정을 통해 동 가계 식별 및 리스크 요인 분석을 실시하였다. 분석 결과 2012년 이후 과다부채 가계의 부채/소득 비율이 여타 가계에 비해 3배 이상 큰 폭으로 상승하였다. 과다부채 가계는 금리인상, 부동산가격 하락이 있을 경우 건전성지표가 2배 이상 큰 폭으로 악화되는 것으로 나타났으며 이로 인해 전체적인 부채상환 리스크가 증가한 것으로 판단된다. 또한 과다부채 가계는 소득탄력성 및 부동산탄력성이 여타 가계에 비해 크게 높아 LTV, DTI 등 총액기준 대출규제 정책도 여전히 유효한 것으로 보인다. 특히 과다부채 가계 중에서도 하위 소득계층 및 55세 이상 고연령층의 부채상환 리스크가 상대적으로 심각한 것으로 나타났다. 이들 계층의 부채/소득비율은 고소득층 및 여타 연령층과 각각 비교할 때 평균 부채보유 가계를 보면 큰 차이가 없으나 과다부채 가계에서는 크게 높아지는 것으로 추정되었다. English Abstract: This paper suggests a new measure of household over-indebtedness based on the concept of conditional quantiles, and use the measure to examine the factors and the risks of the over-indebtedness. We first consider a distribution of household debt conditional on the overall payment ability, and specify the over-indebted household as the one whose debt exceeds θ-quantile of the conditional distribution. The overall payment ability is set to cover a variety of factors such as disposable income, assets, expected income, and consumption backgrounds. θ-quantile is estimated using Chernozhukov and Hong (2002)’s three step estimator for censored quantile regression. The empirical analysis shows a clear evidence of heterogeneous behavior of the over-indebted households compared to the others. We find that over-indebted households’ income and real estate elasticities of debt are significantly higher and their debt/income ratio has increased faster in recent periods of low interest rates. Simulation study shows that these distinctive properties cause over-indebted households facing far greater default risks under macroeconomic shocks such as interest rate hikes and house price drops. We also find that lower-income and elderly-headed households’ over-indebtedness problem is more serious in that they have significantly higher debt/income ratio compared to the other age and income groups.

ECB Monetary Policy Transmission During Normal and Negative Interest Rate Periods

We analyze monetary policy transmission in the euro area from 2009--2016, including changes during the negative interest rate policy (NIRP) period as of June 2014. We identify three dimensions of ECB monetary policy related to surprise changes in (i) the target rate, (ii) the expected future path of the target rate (path factor), and (iii) longer-term interest rates (term factor). We find that surprise shocks about the target rate and the future path of the target rate have strong effects on interbank lending rates and government bond yields. Moreover, expansionary monetary policy surprises related to the term factor decrease government bond yields across all maturities and have strongest effects on medium- and long-term maturities. Prices of riskier assets, such as longer-term assets, sovereign bonds from crisis countries, or equities, increase significantly more in response to expansionary monetary policy shocks during the NIRP period. Moreover, during the NIRP period, expansionary target rate shocks further decrease loan interest rates and strongly increase the origination of new bank loans to businesses and households, particularly for loans with longer maturities.

Pricing the ECB's forward guidance with the EONIA swap curve

On July 4, 2013, following several other major central banks, the European Central Bank (ECB) gave for the first time forward guidance on interest rates, which affected market participants' expectations of future interest rates in the context of a Zero Lower Bound. Using an ARMAX(1,1) model in which the effect of the communication of negative macroeconomic news was disentangled from the commitment positive shock, the impact of the forward guidance on money market interest rates is estimated through the Euro Overnight Index Average swap, also called overnight index swap, at maturities between 2 months and 10 years using abnormal returns from an event study. The results and robustness checks suggest that the ECB's guidance lowered overnight index swap rates for maturities within 10 months to 3 years. These results imply the existence of a commitment effect from the ECB's communication. In the context of decreasing market liquidity because of the 3-year long-term refinancing operation repayment, market participants priced the low period of interest rates until mid-2016.

THE EFFECTS ON COMMODITY PRICES OF EXTRAORDINARY MONETARY POLICY

AbstractThis article examines the relationship between Federal Reserve monetary policy and other macroeconomic indicators to both a broad commodity price index and an agricultural commodity price index by employing a vector error correction model. Excessive liquidity and the recent long period of ultralow interest rates appear to have played a statistically significant role in affecting prices in the commodities markets. The responses of commodity prices to monetary policy that we estimate generally conform to earlier findings, but the sensitivity of the responses appears different in the face of the unprecedented scope of recent Fed activism.

Monetary Policy and Bank Profitability in a Low Interest Rate Environment

We analyse the impact of standard and non-standard monetary policy measures on bank profitability. For empirical identification, the analysis focuses on the euro area, thereby exploiting substantial bank and country heterogeneity within a monetary union where the central bank has implemented a broad range of unconventional policies, including quantitative easing and negative interest rates. We use both proprietary and commercial data on individual bank balance sheets and financial market prices. Our results show that monetary policy easing – a decrease in short-term interest rates and/or a flattening of the yield curve – is not associated with lower bank profits once we control for the endogeneity of the policy measures to expected macroeconomic and financial conditions. Importantly, our analysis indicates that the main components of bank profitability are asymmetrically affected by accommodative monetary conditions, with a positive impact on loan loss provisions and non-interest income largely offsetting the negative one on net interest income. We also find that a protracted period of low interest rates might have a negative effect on profits that, however, only materialises after a long period of time and tends to be counterbalanced by improved macroeconomic conditions. In addition, while more operationally efficient banks benefit more from monetary policy easing, banks engaging more extensively in maturity transformation experience a higher increase in profitability after a steepening of the yield curve. Finally, we assess the impact of unconventional monetary policies on market-based measures of expected bank profitability and credit risk, by employing an event study analysis using high frequency data, and find that accommodative monetary policies tend to increase bank stock returns and reduce credit risk.

A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers

In this paper, we develop an analytical framework for conducting forward-looking assessments of profitability and solvency of the main euro area insurance sectors. We model the balance sheet of an insurance company encompassing both life and non-life business and we calibrate it using country level data to make it representative of the major euro area insurance markets. Then, we project this representative balance sheet forward under stochastic capital markets, stochastic mortality developments and stochastic claims. The model highlights the potential threats to insurers solvency and profitability stemming from a sustained period of low interest rates particularly in those markets which are largely exposed to reinvestment risks due to the relatively high guarantees and generous profit participation schemes. The model also proves how the resilience of insurers to adverse financial developments heavily depends on the diversification of their business mix. Finally, the model identifies potential negative spillovers between life and non-life business thorugh the redistribution of capital within groups.

Determinants of Microfinance Bank Loan Default in Niger State, Nigeria

Microfinance Bank is important for poverty reduction and employment creation. However, one major threat to Microfinance banks’ sustainability is Loan Default. The objective of the study is to identify the socio-economic factors that determine the probability of loan default in Niger state. Data were collected using the multistage random sampling technique from 300 borrowers. Data obtained from survey were analysed using a Logit Model. The results show that borrower’s/sex, age, family size, income, interest rate and amortization period significantly determine borrower’s probability of loan default in the study area, whereas borrowers’ educational qualification and experience was found not statistically significant in the determination of Microfinance Banks loan default. The study recommends Banks should have perfect knowledge about borrower’s income status and family size, Bank should consider income of the borrowers, when determining the grace period and amortization period, administrative charges should be lower bearing in mind the rate of interest charge on loan and Quick follow-up visits after a missed payment would prevent high default rate.

Stock Market Efficiency under the Cost of Carry Model. Evidence from the Spanish Market

This paper studies the conceptual framework of the calculation of the theoretical price of the future based on the cost of carry model and assesses the results of applying this model to the closing prices of the Spanish Market for 2007-2015. Whilst most of the research carried out into market efficiency and the arbitrage opportunities are focused on time series analysis with minute interval, this study analyses the efficiency at the end of the day. This information is particularly relevant to assess the efficacy of the hedging strategy in the daily accounting results of mutual and pension funds, insurance companies and other asset management portfolios. The results obtained suggest that the Spanish Stock Market can be considered efficient, since there are no significant differences between the market and the theoretical price of the future on IBEX 35. The effect of volatility in market efficiency has also been tested, with the result that the most volatile part of the sample presents an absolute percentage error which almost doubles that of the least volatile. Recent negative interest rate period has been separately analysed too in order to assess an eventual source of inefficiency: no significant impact has been observed in that respect.

The Portfolio Balance Mechanism and QE in the Euro Area

The paper analyses quantitative easing (QE) in a dynamic general‐equilibrium model which includes assets of different types and maturity. We explicitly model asset purchases by the central bank and their impact on the central bank's balance sheet. In particular, QE is captured by central bank purchases of long‐term government bonds financed by enhanced liquidity provision to the private sector. With imperfect substitutability between asset classes, QE affects the term premium, stock prices, the exchange rate and the private sector's saving decision. We use the model to simulate the European Central Bank's (ECB's) QE path as announced in early 2015. With six basis points term‐premium reduction the model generates 0.9 per cent effective euro depreciation and raises real GDP in the euro area by 0.3 per cent and prices by 0.5 per cent by 2016. Enduring periods of low interest rates strengthen the expansionary effect of QE in the short and medium term. Frontloading of asset purchases has little impact on output and inflation effects as long as the duration of the balance sheet expansion remains unchanged. Expansionary effects of QE are reduced if the central bank purchases eligible assets from foreign rather than domestic counterparties.

A Stochastic Forward-Looking Model to Assess the Profitability and Solvency of European Insurers

In this paper, we develop an analytical framework for conducting forward-looking assessments of profitability and solvency of the main euro area insurance sectors. We model the balance sheet of an insurance company encompassing both life and non-life business and we calibrate it using country level data to make it representative of the major euro area insurance markets. Then, we project this representative balance sheet forward under stochastic capital markets, stochastic mortality developments and stochastic claims. The model highlights the potential threats to insurers solvency and profitability stemming from a sustained period of low interest rates particularly in those markets which are largely exposed to reinvestment risks due to the relatively high guarantees and generous profit participation schemes. The model also proves how the resilience of insurers to adverse financial developments heavily depends on the diversification of their business mix. Finally, the model identifies potential negative spillovers between life and non-life business thorugh the redistribution of capital within groups.

Separation of Investment Banking and Commercial Banking: Implication for Public Interest and Confidence

The purpose of this paper is to critically examine existing literature on separation of commercial banking activities from investment banking activities in order to advise whether the commercial and investment banking activities should be combined or separated. Introduction of new regulation in the wake of global financial crisis bring with it additional operating cost to operators of the financial sectors. While supervising plethora of regulations by central banks becomes difficulty and in the end nothing is achieve from it. The paper identified the causes of the global financial crisis that commenced in the mid-2007 as a result of global financial imbalance; long period of low interest rates in the advanced economies; consumer failure to monitor for themselves; managers compensation schemes encouraged risk-taking; skewed incentives of the rating agencies and finally, the limitation of risk measurement and regulation. These reasons contributed to the global financial crises and not the repealed Glass-Steagall Act. The study concluded that the repealed of the Act did not cause the global financial crisis in 2007 but was rather due to inadequate supervision by the regulators. The study adopts content analysis to assess the risks associated with combining the two operations together and those who posit that the combination should be separated and those in favour of it. The study professed some recommendations that will protect public interest and private capital while carrying out combined operations of commercial banking and investment banking activities.

Towards Empowering Rural Women through Micro-Finance Assisted Income Generating Activities: The Case of Wesasa Microfinance Institution, Dandi District, Ethiopia

Despite the involvement of various micro-finance institutions towards empowering women through micro-finance assisted income generating activities in Ethiopia, the status of majority of the rural women is still not pleasing in Ethiopia. This study assessed constraints of rural women in having access to loan service from micro-finance institutions and loan repayment process by taking Wesasa Micro-finance institution in Dendi District, Ethiopia as a case study. The study employed a mixed research design by integrating quantitative and qualitative methods of data collection and analysis. The results of the analysis indicate that participation of rural women in micro-finance assisted income generating activities contributes for economical, psychological, social, political, legal, and technological empowerment of rural women in the study area. However, constraints of rural women in accessing loan and loan repayment process should be properly addressed by stakeholders to improve the contribution of micro-finance institutions for achieving sustainable development goals related to rural women in the study area, Ethiopia, and developing countries. In conclusion, facilitating enough amount of loan for the borrowers with affordable interest rate and long time loan repayment period is of paramount importance as rural investments require time to generate income or profit.

Investment Under Uncertainty When Interest Rates Are at the Zero Lower Bound

This paper examines irreversible investment decisions when interest rates are at the lower bound. A simple model is presented in which the shadow-rate model of Black (1995) is used for modeling interest rate uncertainty. It is shown that when interest rates are at the lower bound and the shadow rate is substantially below the bound the investment decision no longer depends on interest rate uncertainty. The decision to invest or wait is determined entirely by cash flow volatility. Monetary policy becomes ineffective because it cannot offset uncertainly shocks that increase the value of waiting. In contrast to extant approaches, the shadow rate model is consistent with prolonged periods of interest rates at the lower bound and low investment.

Macro-Prudential Response to Increased Global Market Volatility

Volatilities of price indicators have remained extremely stabilized during the period of low interest rates since the Global Financial Crisis (GFC) of September 2009. Low volatility pushes down risk premium. That could lead global investors’ risk appetite to increase. There has been a big change in global liquidity flows since 2009. Emerging market economies (EMEs), with relatively high credit risk, received a huge capital inflows backed up by the increased risk appetite of global investors.US Federal Reserve is now trying to normalize its monetary policy by increasing the policy rate tied at zero low bound for about seven years. This will bring asset price volatility and risk premium to normalize too. We remain concerned about the downside risk to the capital outflows from EMEs, including Korea. And it may well potentially cause a decrease in asset price and a growth contraction in EMEs. Accordingly, we overview volatility of financial market and new trends in capital flows, and identify the determinants of capital flows to/from EMEs. We also review the use of capital flow management policies in EMEs including Korea, and examine the effectiveness of Asset? Based Reserve Requirements (ABRR) as an alternative macro-prudential policy measure to manage capital flows.

IMPACT OF LOAN CYCLE ON EMPOWERMENT IN MICRO FINANCE

The present study basically analyse the level of empowerment of people especially women in different loan cycle in the SHG loan. The study specifically examined the level of empowerment through microfinance in the region of North Kerala. Prevailing interest rate and repayment period of loan is supportive to the better utilisation of loan and thereby it brings empowerment. SHG members are participating in rural development, sustainable development, agriculture and commercial investment and thereby they are getting empowered. In the present scenario caste system and religious regulations are not supporting the women empowerment. By getting financial support to the poor automatically the whole society will get empowered. Reinvestment, loan system and financial support have significant impact on empowerment. The results of the study reveal that status of empowerment will vary according to the level of loan cycle. Higher loan cycle leads to higher empowerment.

A system dynamics approach to logistics outsourcing policies and decisions

This paper is based on a revelatory single-case study that uses a system dynamics model to analyze the costs and policies of a distribution logistics outsourcing process (i.e., the warehousing and transportation activities) of a Brazilian consumer packaged goods (CPG) company. The model considers the costs before and after the outsourced operation startup and how these costs influence the net present value (NPV) of the process. The model’s findings suggest policies, such as the reduction of the ex-ante period and the ex-ante reactive and proactive monitoring of operations, to obtain optimal financial results. In addition, the model provides guidelines for the contract lengths and demonstrates that in the outsourcing process, the greatest gains result during periods of low inflation and low interest rates in a stable economy.