Determinants of bank’s interest margin in the aftermath of the crisis: the effect of interest rates and the yield curve slope

Using data from the Treasury versus London Interbank Offer Swap Rates (LIBOR) for October 1987 to June 1998, this paper examines the determinants of swap spreads in the Treasury-LIBOR interest rate swap market. This study hypothesizes Treasury-LIBOR swap spreads as a function of the Treasury rate of comparable maturity, the slope of the yield curve, the volatility of short-term interest rates, a proxy for default risk, and liquidity in the swap market. The study finds that, in the long-run, swap spreads are negatively related to the yield curve slope and liquidity in the swap market. We also find that swap spreads are positively related to the short-term interest rate volatility. In the short-run, swap market's response to higher default risk seems to be higher spread between the bid and offer rates.

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Equilibrium Investment and Asset Prices under Imperfect Corporate Control

The American Economic Review ◽

10.1257/0002828054201422 ◽

2005 ◽

Vol 95 (3) ◽

pp. 659-681 ◽

Cited By ~ 35

Author(s):

James Dow ◽

Gary Gorton ◽

Arvind Krishnamurthy

Keyword(s):

Interest Rates ◽

Cash Flow ◽

Asset Prices ◽

Yield Curve ◽

Dynamic Equilibrium ◽

Corporate Control ◽

Free Cash Flow ◽

Financial Friction ◽

And Control ◽

Important State

We integrate a widely accepted version of the separation of ownership and control—Michael Jensen's (1986) free cash flow theory—into a dynamic equilibrium model, and study the effect of imperfect corporate control on asset prices and investment. Aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices, investment, and the cyclical behavior of interest rates and the yield curve. The financial friction causes cash-flow shocks to affect investment, and causes otherwise i.i.d. shocks to be transmitted from period to period. The shocks propagate through large firms and during booms.

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Yield curve dynamics with macroeconomic factors in Iberian economies

Global Journal of Business Economics and Management Current Issues ◽

10.18844/gjbem.v10i3.4691 ◽

2020 ◽

Vol 10 (3) ◽

pp. 193-203

Author(s):

Isabel Maldonado ◽

Carlos Pinho

Keyword(s):

Interest Rates ◽

Term Structure ◽

Yield Curve ◽

Error Variance ◽

Impact Factors ◽

Strong Impact ◽

Impulse Response Functions ◽

Macroeconomic Factors ◽

Vector Autoregressive ◽

Future Evolution

Abstract The aim of this paper is to analyse the bidirectional relation between the term structure of interest rates components and macroeconomic factors. Using a factor augmented vector autoregressive model, impulse response functions and forecasting error variance decompositions we find evidence of a bidirectional relation between yield curve factors and the macroeconomic factors, with increased relevance of yield factors over it with increased forecasting horizons. The study was conduct for the two Iberian countries using information of public debt interest rates of Spain and Portugal and macroeconomic factors extracted from a set of macroeconomic variables, including indicators of activity, prices and confidence. Results show that the inclusion of confidence and macroeconomic factors in the analysis of the relationship between macroeconomics and interest rate structure is extremely relevant. The results obtained allow us to conclude that there is a strong impact of changes in macroeconomic factors on the term structure of interest rates, as well as a significant impact factors of the term structure in the future evolution of macroeconomic factors.

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Monetary Policy Surprises over Time

Quarterly Journal of Finance ◽

10.1142/s2010139218400025 ◽

2018 ◽

Vol 08 (01) ◽

pp. 1840002 ◽

Cited By ~ 1

Author(s):

Marcello Pericoli ◽

Giovanni Veronese

Keyword(s):

Monetary Policy ◽

Financial Markets ◽

Interest Rates ◽

Euro Area ◽

Yield Curve ◽

Sovereign Spreads ◽

Definition Of ◽

Term Premia ◽

The Impact ◽

Over Time

We document how the impact of monetary surprises on euro-area and US financial markets has changed from 1999 to date. We use a definition of monetary policy surprises, which singles out movements in the long-end of the yield curve — rather than those changing nearby futures on the central bank reference rates. By focusing only on this component of monetary policy, our results are more comparable over time. We find a hump-shaped response of the yield curve to monetary policy surprises, both in the pre-crisis period and since 2013. During the crisis years, Fed path-surprises, largely through their effect on term premia, account for the impact on interest rates, which is found to be increasing in tenor. In the euro area, the path-surprises reflect the shifts in sovereign spreads, and have a large impact on the entire constellation of interest rates, exchange rates and equity markets.

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

Przegląd Statystyczny ◽

10.5604/01.3001.0014.8494 ◽

2021 ◽

Vol 67 (4) ◽

pp. 294-307

Author(s):

Ewa Majerowska ◽

Jacek Bednarz

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Yield Curve ◽

Stock Exchange ◽

Rate Curve ◽

Daily Data ◽

Warsaw Stock Exchange ◽

The Interest Rate ◽

Relationship Of

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.

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Yield Curves, Swap Curves, and Term Structure of Interest Rates

Debt Markets and Investments ◽

10.1093/oso/9780190877439.003.0012 ◽

2019 ◽

pp. 203-228

Author(s):

Tom P. Davis ◽

Dmitri Mossessian

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Yield Curve ◽

Yield Curves ◽

No Arbitrage ◽

Interest Rate Swap ◽

The Interest Rate ◽

Rate Swap ◽

The U.S

This chapter discusses multiple definitions of the yield curve and provides a conceptual understanding on the construction of yield curves for several markets. It reviews several definitions of the yield curve and examines the basic principles of the arbitrage-free pricing as they apply to yield curve construction. The chapter also reviews cases in which the no-arbitrage assumption is dropped from the yield curve, and then moves to specifics of the arbitrage-free curve construction for bond and swap markets. The concepts of equilibrium and market curves are introduced. The details of construction of both types of the curve are illustrated with examples from the U.S. Treasury market and the U.S. interest rate swap market. The chapter concludes by examining the major changes to the swap curve construction process caused by the financial crisis of 2007–2008 that made a profound impact on the interest rate swap markets.

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Interest Rates and Business Returns

National Institute Economic Review ◽

10.1177/0027950107083040 ◽

2007 ◽

Vol 201 ◽

pp. 4-7

Author(s):

Martin Weale

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Rate Increase ◽

Yield Curve ◽

Current Level ◽

Short Term ◽

The Past ◽

Financial Options ◽

Very High ◽

Business Returns

The July interest rate increase has taken the Bank of England's Base Rate to the highest value for six years. In figure 1 we show the forward estimates for the nominal short-term interest rate taken from the Bank of England's yield curve tables for both government debt and liabilities of commercial banks. These are in effect market forecasts of the short-term rate produced in the past. The graph shows that the market has been taken somewhat by surprise by rising short-term interest rates. Two years ago the market was forecasting a rate of around 4 per cent per annum for July 2007. Nor were the probabilities the market gave to an interest rate of 5.75 per cent per annum very high. Twelve months ago the market in financial options implied that the chance of the rate exceeding 5.66 per cent per annum was only 15 per cent. Even in January of this year the chance of it reaching its current level or higher was put at less than 25 per cent. The National Institute cannot claim a substantially better record at forecasting interest rates. We normally use market expectations, as calculated from the yield curve, to provide exogenous forecasts as input into our model in the short term.

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A Nonparametric Approach to Bond Portfolio Immunization

Mathematics ◽

10.3390/math7111121 ◽

2019 ◽

Vol 7 (11) ◽

pp. 1121

Author(s):

Victor Lapshin

Keyword(s):

Interest Rates ◽

Term Structure ◽

Best Practice ◽

Yield Curve ◽

Model Parameters ◽

Dimensional Manifold ◽

Nonparametric Approach ◽

Hedging Portfolio ◽

Practice Approach ◽

Low Dimensional

We consider the problem of short term immunization of a bond-like obligation with respect to changes in interest rates using a portfolio of bonds. In the case that the zero-coupon yield curve belongs to a fixed low-dimensional manifold, the problem is widely known as parametric immunization. Parametric immunization seeks to make the sensitivities of the hedged portfolio price with respect to all model parameters equal to zero. However, within a popular approach of nonparametric (smoothing spline) term structure estimation, parametric hedging is not applicable right away. We present a nonparametric approach to hedging a bond-like obligation allowing for a general form of the term structure estimator with possible smoothing. We show that our approach yields the standard duration based immunization in the limit when the amount of smoothing goes to infinity. We also recover the industry best practice approach of hedging based on key rate durations as another particular case. The hedging portfolio is straightforward to calculate using only basic linear algebra operations.

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