Six-month Treasury Bills Research Articles

The Impact of Downside Beta on Stock Price Behavior in Pakistan

Purpose- The purpose of this study is to construct a portfolio based on downside beta as a measure of downside risk. The analysis uses data from all listed companies on the Pakistan Stock Exchange (PSE) over the period from January 2000 to December 2021. Study Design/Methodology/Approach - The study employs a rolling window approach with 36 consecutive months to estimate downside beta values for portfolios ranked from lowest to highest downside beta. Portfolio returns are evaluated using the Generalized Method of Moments (GMM) in conjunction with the Capital Asset Pricing Model (CAPM) and the Fama-French three- and five-factor models. A six-month Treasury bill rate is used as the risk-free rate. Findings- The study reveals a significant spread between the downside beta values of the constructed portfolios, confirming that downside risk can be effectively captured through this approach. The hypothesis of equal mean downside beta across the portfolios is rejected, indicating that portfolios based on downside beta exhibit different risk-adjusted returns. Furthermore, the rejection of the alpha equal to zero hypothesis suggests that these risk-adjusted returns are statistically significant. However, the study finds that lower partial moments do not fully explain the variation in downside risk. Practical Implications- These findings are particularly relevant for investors focused on managing downside risk. The study offers alternative methods for constructing portfolios that account for downside risk, which could enhance risk management strategies. However, the reliance on historical data from the PSE may limit the generalizability of these findings to other markets. Originality/Novelty - This study contributes to the literature by constructing portfolios grounded in downside beta as a measure of downside risk, offering a novel approach to portfolio formation and risk-adjusted return evaluation. It highlights the importance of incorporating downside risk in portfolio management and presents an innovative application of downside beta within the context of emerging markets.

Financial market determinants of the real cost of funds to public corporations in the US

Purpose The purpose of this study is to provide new empirical evidence on the impact of a variety of financial market forces on the ex post real cost of funds to corporations, namely, the ex post real interest rate yield on AAA-rated long-term corporate bonds in the USA. The study is couched within an open-economy loanable funds model, and it adopts annual data for the period 1973-2013, so that the results are current while being applicable only for the post-Bretton Woods era. The auto-regressive two-stage least squares (2SLS) and generalized method of moments (GMM) estimations reveal that the ex post real interest rate yield on AAA-rated long-term corporate bonds in the USA was an increasing function of the ex post real interest rate yields on six-month Treasury bills, seven-year Treasury notes, high-grade municipal bonds and the Moody’s BAA-rated corporate bonds, while being a decreasing function of the monetary base as a per cent of gross domestic product (GDP) and net financial capital inflows as a per cent of GDP. Finally, additional estimates reveal that the higher the budget deficit as a per cent of GDP, the higher the ex post real interest rate on AAA-rated long-term corporate bonds. Design/methodology/approach After developing an initial open-economy loanable funds model, the empirical dimension of the study involves auto-regressive, two-stage least squares and GMM estimates. The model is then expanded to include the federal budget deficit, and new AR/2SLS and GMM estimates are provided. Findings The AR/2SLS and GMM (generalized method of moments) estimations reveal that the ex post real interest rate yield on AAA-rated long-term corporate bonds in the USA was an increasing function of the ex post real interest rate yields on six-month Treasury bills, seven-year Treasury notes, high-grade municipal bonds and the Moody’s BAA-rated corporate bonds, while being a decreasing function of the monetary base as a per cent of GDP and net financial capital inflows as a per cent of GDP. Finally, additional estimates reveal that the higher the budget deficit as a per cent of GDP, the higher the ex post real interest rate on AAA-rated long -term corporate bonds. Originality/value The author is unaware of a study that adopts this particular set of real interest rates along with net capital inflows and the monetary base as a per cent of GDP and net capital inflows. Also, the data run through 2013. There have been only studies of deficits and real interest rates in the past few years.

The response of term rates to monetary policy uncertainty

This paper shows that greater uncertainty about monetary policy can lead to a decline in nominal interest rates. In the context of a limited participation model, monetary policy uncertainty is modeled as a mean preserving spread in the distribution for the money growth process. This increase in uncertainty lowers the yield on short-term maturity bonds because the household sector responds by increasing liquidity in the banking sector. Long-term maturity bonds also have lower yields but this decrease is a result of the effect that greater uncertainty has on the nominal intertemporal rate of substitution—which is a convex function of money growth. We examine the nature of these relations empirically by introducing the GARCH-SVAR model—a multivariate generalization of the GARCH-M model. The predictions of the model are broadly supported by the data: higher uncertainty in the federal funds rate can lower the yields of the three- and six-month treasury bill rates.

Liquidity, Uncertainty, and the Declining Predictive Power of the Paper-Bill Spread

The spread between the yields on six-month commercial paper and six-month Treasury bills (the paper-bill spread) has been shown to be a good predictor of macroeconomic variables such as GDP and real income, at least through the mid-1980s. In this working paper, Ferderer, Vogt, and Chahil explore reasons why this variable yielded such predictive power in the past and evidence of why its predictive power has waned.

Unit roots, interest rate spreads, and inflation forecasts

Recent research suggests that long-term interest rate spreads provide information that can be useful in forecasting inflation, but that the spread between the three-month and six-month Treasury bill rates appears to have little forecasting ability. This paper uses the concepts of unit roots and cointegration to examine the failure of the short-term T-bill spread to forecast inflation. The results suggest that the interest rate spread has little forecasting value because inflation and the interest rate spread exhibit distinctly different time-series properties.

Testing the term structure of interest rates using a stationary vector autoregression with regime switching

The expectations model of the term structure for US data on three- and six-month treasury bills for the period 1962(1)–1987(3) is explored. The analysis allows for the nonstationarity of the data, and for unobserved stochastic switches of regime, by estimating VARs in the yield spread and the change in the three-month rate which allow the time series processes to change between regimes. In contrast to other results for the expectations model, such as those of Hamilton (1988), Mankiw and Miron (1986), and others, we find that the data do not reject the model.

An empirical analysis of the expert expectations hypothesis in the US Treasury bill market

This paper proposes the consensus value of the experts' expectations to predict the future three-month Treasury bill rate. Applying quarterly data, 1981 :Q3–1989:Q4, to three- and six-month Treasury bill markets indicates that one cannot reject the unbiasedness hypothesis. Empirical analysis indicates that experts use information from the slope of the yield curve, changes in the recent three-month bill rate, and a time-varying risk premium to predict the change in the future three-month bill rate. This study documents the consensus of experts' expectations as an optimal predictor of the future three-month bill rate.

Treasury Bill Rates in the 1970s and 1980s

As is widely recognized, real interest rates in the early 1980s were at peaks not witnessed since the late 1920s. Less well perceived is the sharp decline in real interest rates in the middle 1980s to their average levels of the previous quarter century. This paper seeks to identify the underlying determinants of the major movements in real six-month Treasury bill rates. The primary innovation is the development of a new monetary policy proxy that explains much of the real rate movement in the 1980s.

Geographical Integration and the Retail CD-Pricing Decisions of Large Depository Institutions

This paper focuses on the six-month retail certificate of deposit (CD) rates of large depository institutions in six major cities during 1983-1988 to test the integration of their retail CD markets. Using Granger's (1986) concept of co-integration, we find a long-run equilibrium relationship between the city CD-rate offers and the six-month Treasury bill rate. After filtering out this relationship, a vector autoregressive model is employed with Granger (1969) causality tests to determine the significance of intercity rate dependencies. Our results indicate an increasing number of intercity relations over time, consistent with an emerging integrated market. Since our sample represents a subset of bank CDs for the largest firms operating in six of the nation's largest cities, the results should not be generalized to other smaller bank markets, CD maturities, or bank products. The periods examined are also close together in time, which could affect the robustness of the results.

Post-Deregulation Bank-Deposit-Rate Pricing: The Multivariate Dynamics

The relationship between wholesale and retail interest rates since deregulation is of substantial interest to economists and policymakers, because the predictability of the monetary aggregates and their relationship to bank reserves depend on adjustment patterns in the wholesale and retail money markets. We provide evidence on the nature of wholesale–retail interest rate relationships by examining the dynamic interactions among two wholesale interest rates (federal funds and six-month treasury bills) and three retail deposit rates (six-month consumer certificates of deposit, money market deposit accounts, and super NOW's). We perform a multivariate time series analysis, with particular attention paid to causal patterns and the shapes of impulse- response functions. A number of stylized facts, related to size of adjustment, speed of adjustment, and pattern of adjustment, are established for the response of retail rates to unanticipated shocks in wholesale rates.

Rational expectations and the expectations model of the term structure: A test using weekly data

This paper tests the joint hypothesis of rational expectations model of the term structure for three- and six-month Treasury bills. Previous studies are extended in two main directions. First, the joint hypothesis is tested using weekly data for Treasury bills maturing in exactly 13 and 26 weeks beginning in 1970 and ending in 1979. In contrast, previous studies using comparable data have typically discarded 12/13 of the sample to a form a nonoverlapping data set. Second, a more complete set of possible determinants of time-varying premiums is tested.

Interpreting the Yield Curve

(1976). Interpreting the Yield Curve. Financial Analysts Journal: Vol. 32, No. 6, pp. 37-45.

A Note on the `Traditional Theory' of the Term Structure of Interest Rates and Rates on Three- and Six-Month Treasury Bills: Comment

A Note on the `Traditional Theory' of the Term Structure of Interest Rates and Rates on Three- and Six-Month Treasury Bills: Comment