Joint modeling of yield curve shape and dynamics: An empirical validation of term structure simulations for long-term government debt management

2013 ◽  
pp. 153-193
Author(s):  
Anja Hubig
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Government Debt ◽  
Joint Modeling ◽  
Debt Management ◽  
Empirical Validation ◽  
Curve Shape

scholarly journals Liquidity-Adjusted Benchmark Yield Curves: A Look at Trading Concentration and Information

2007 ◽  
Vol 10 (04) ◽  
pp. 491-518 ◽  
Author(s):  
William T. Lin ◽  
David S. Sun
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Information Discovery ◽  
Affine Term Structure ◽  
Term Structure Model ◽  
Long Run ◽  
Fitting Method ◽  
Bond Issues ◽  
Short Run

Estimation of benchmark yield curve in developing markets is often influenced by liquidity concentration. Based on an affine term structure model, we develop a long run liquidity weighted fitting method to address the trading concentration phenomenon arising from horizon-induced clientele equilibrium as well as information discovery. Specifically, we employ arguments from models of liquidity concentration and benchmark security information. After examining time series behavior of price errors against our fitted model, we find results consistent with both the horizon and information hypotheses. Our evidence indicates that trading liquidity carries information effect in the long run, which cannot be fully captured in the short run. Trading liquidity plays a key role in long run term structure fitting. Markets for liquid benchmark government bond issues collectively form a long term equilibrium. Compared with previous studies, our results provide a robust and realistic characterization of the spot rate term structure and related price forecasting over time, which in turn help portfolio investment of fixed income and long run pricing of financial instruments.

scholarly journals Biased Decision-Making and Liquidity Buffer in Commercial Banking

2018 ◽  
Vol 5 (2) ◽  
pp. 84
Author(s):  
Mingyuan Sun
Keyword(s):  
Term Structure ◽  
Reference Point ◽  
Yield Curve ◽  
Risk Preference ◽  
Framing Effect ◽  
Portfolio Allocation ◽  
Commercial Banking ◽  
Bank Run ◽  
Liquidation Cost

Few derived versions based on the classic bank run model have taken into account the framing effect of general lenders. The purpose of this study is to revisit the issue and discuss a model of bank run equilibrium combined with biased risk preference, which is applied to analyze how portfolio allocation and liquidity buffer in commercial banks are affected by liquidation cost and the reference point. The results suggest the condition on which the liquidity buffer of a particular bank should provide. Liquidation cost is positively correlated with the lower bound of liquidity buffer. The effect of the reference point on liquidity buffer partially depends on the slope of yield curve term structure. Higher reference point could typically cause a lower portion of long-term investment.

Inter-dependencies among Asian bond markets

2017 ◽  
Vol 34 (4) ◽  
pp. 485-505 ◽  
Author(s):  
Sowmya Subramaniam ◽  
Krishna P. Prasanna
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Factor Model ◽  
Dynamic Factor ◽  
Bond Markets ◽  
Content Type ◽  
Monetary Authorities ◽  
Asian Economies ◽  
Regional Factors

Purpose The purpose of the paper is to investigate the global and regional influences on the domestic term structure of nine Asian economies. Design/methodology/approach The dynamic Nelson Siegel model was used to extract the latent factors of a country’s yield curve movements in a state-space framework using the Kalman filter. The global and regional factors of the yield curve were extracted using the dynamic factor model. Further, the Bayesian inference of Gibbs sampling approach was used to identify the influence of global and regional factors on the domestic yield curve. Findings The results suggest that financial integration does not reduce the control of monetary authorities on the front end of the yield curve, and long-term interest rate is the potential transmission channel through which the contagion of the financial crisis spreads. Practical implications The results of this study would help the monetary authorities to understand the efficacy of the monetary policy transmission mechanism. It also offers the global investors diversification opportunities for investing in the Asian bond markets. Originality/value It is one of the earliest attempts to capture the global and regional yield curve movements and their impact on the emerging Asian economies yield curve. It contributes to literature by identifying the linkages in the long-term factor that is the potential channel through which crisis spreads.

scholarly journals Take the Short Route: Equilibrium Default and Debt Maturity

Econometrica ◽  
2019 ◽  
Vol 87 (2) ◽  
pp. 423-462 ◽  
Author(s):  
Mark Aguiar ◽  
Manuel Amador ◽  
Hugo Hopenhayn ◽  
Iván Werning
Keyword(s):  
Sovereign Debt ◽  
Yield Curve ◽  
Debt Management ◽  
Limited Commitment ◽  
Bond Markets ◽  
Short Term ◽  
Marginal Costs ◽  
Wide Range ◽  
Debt Default

We study the interactions between sovereign debt default and maturity choice in a setting with limited commitment for repayment as well as future debt issuances. Our main finding is that, under a wide range of conditions, the sovereign should, as long as default is not preferable, remain passive in long‐term bond markets, making payments and retiring long‐term bonds as they mature but never actively issuing or buying back such bonds. The only active debt‐management margin is the short‐term bond market. We show that any attempt to manipulate the existing maturity profile of outstanding long‐term bonds generates losses, as bond prices move against the sovereign. Our results hold regardless of the shape of the yield curve. The yield curve captures the average costs of financing at different maturities but is misleading regarding the marginal costs.

scholarly journals Some Lessons from the Yield Curve

1995 ◽  
Vol 9 (3) ◽  
pp. 129-152 ◽  
Author(s):  
John Y Campbell
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Bond Market ◽  
Expectations Hypothesis ◽  
Expectation Hypothesis ◽  
Maturity Structure ◽  
Short And Long Term ◽  
The U.S

This paper reviews the literature on the relation between short- and long-term interest rates. It summarizes the mixed evidence on the expectation hypothesis of the term structure: when long rates are high relative to short rates, short rates tend to rise as implied by the expectations hypothesis, but long rates tend to fall, which is contrary to the expectations hypothesis. The paper discusses the response of the U.S. bond market to shifts in monetary policy in the spring of 1994 and reviews the debate over the optimal maturity structure of the U.S. government debt.

scholarly journals International Evidence on Extending Sovereign Debt Maturities

2021 ◽  
pp. 1.000-30.000
Author(s):  
Jens H. E. Christensen ◽  
◽  
Jose A Lopez ◽  
Paul Mussche
Keyword(s):  
Asset Management ◽  
Sovereign Debt ◽  
Yield Curve ◽  
Debt Management ◽  
Bond Markets ◽  
Foreign Government ◽  
Treasury Bond ◽  
Government Bond Markets ◽  
Dynamic Yield

Portfolio diversification is as important to debt management as it is to asset management. In this paper, we focus on diversification of sovereign debt issuance by examining the extension of the maximum maturity of issued debt. In particular, we examine the potential costs to the U.S. Treasury of introducing 50-year bonds as a financing option. Based on evidence from foreign government bond markets with such long-term debt, our results suggest that a 50-year Treasury bond would likely trade at an average yield that is at most 20 basis points above that of a 30-year bond. Our results based on extrapolations from a dynamic yield curve model using just U.S. Treasury yields are similar.

scholarly journals Shape Evolution of the Interest Rate Term Structure

2021 ◽  
Vol 13 (3) ◽  
Author(s):  
Biwei Chen
Keyword(s):  
Interest Rate ◽  
Term Structure ◽  
Yield Curve ◽  
Yield Spread ◽  
Shape Evolution ◽  
Curve Shape ◽  
Yield Spreads ◽  
Novel Approach ◽  
Interest Rate Term Structure ◽  
The Interest Rate

This paper adopts a novel approach to studying the evolution of interest rate term structure over the U.S. business cycles and to predicting recessions. Applying an effective algorithm, I classify the Treasury yield curve into distinct shapes and find the less frequent shapes intrinsically linked to the recessions in the post-WWII data. In forecasting recessions, the median-short yield spread trumps the long-short spread for horizons up to 17 months ahead and the yield curve shape is nearly impressive as the median-short spread. Overall, the yield curve shape is an informative but more succinct indicator than the spreads in studying the term structure. Key words: Business cycle, recession forecast, U.S. Treasury yield curve, yield spreads.

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