scholarly journals Beauty Contests and the Term Structure

2021 ◽  
Author(s):  
Martin Ellison ◽  
Andreas Tischbirek
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Aggregate Demand ◽  
Significant Proportion ◽  
Real Term ◽  
Quantitative Model ◽  
Discount Factors ◽  
Stochastic Discount Factors ◽  
Beauty Contest ◽  
Term Premia

Abstract A novel decomposition highlights the scope for information to influence the term structure of interest rates. Based on the law of total covariance, we show that real term premia in macroeconomic models contain a component that depends on covariances of realised stochastic discount factors and a component that depends on covariances of expectations of those stochastic discount factors. The covariance of expectations is typically low in macro-finance models, which contributes to the real term premia implied by the models being at least an order of magnitude too small, a result that is unchanged even if we introduce aggregate demand externalities combined with shocks to higher-order beliefs. We argue that generating realistic term premia requires there to be strategic complementarities in the formation of expectations. A quantitative model, in which beliefs are formed in a beauty contest, can explain a significant proportion of observed term premia, when estimated using data on expectations of productivity growth from the Survey of Professional Forecasters.

scholarly journals Core and ‘Crust’: Consumer Prices and the Term Structure of Interest Rates

2019 ◽  
Vol 33 (8) ◽  
pp. 3719-3765 ◽  
Author(s):  
Andrea Ajello ◽  
Luca Benzoni ◽  
Olena Chyruk
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Real Term ◽  
No Arbitrage ◽  
Market Participants ◽  
Oxford University ◽  
Term Structures ◽  
Consumer Prices ◽  
Real Risk ◽  
Pass Through

Abstract We propose a no-arbitrage model of the nominal and real term structures that accommodates the different persistence and volatility of distinct inflation components. Core, food, and energy inflation combine into a single total inflation measure that ties nominal and real risk-free bond prices together. The model successfully extracts market participants’ expectations of future inflation from nominal yields and inflation data. Estimation uncovers a factor structure common to core inflation and interest rates and downplays the pass-through effect of short-lived food and energy shocks on inflation and interest rates. Model forecasts systematically outperform survey forecasts and other benchmarks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment

2014 ◽  
Vol 104 (1) ◽  
pp. 323-337 ◽  
Author(s):  
Michael D. Bauer ◽  
Glenn D. Rudebusch ◽  
Jing Cynthia Wu
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Small Sample ◽  
Maximum Likelihood Estimates ◽  
Affine Term Structure ◽  
Term Premium ◽  
Affine Term Structure Models ◽  
International Panel ◽  
Term Premia ◽  
Macroeconomic Determinants

Term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small-sample bias. We show that accounting for this bias alters the conclusions about the trend, cycle, and macroeconomic determinants of the term premia estimated in Wright (2011). His term premium estimates are essentially acyclical, and often just parallel the secular trend in longterm interest rates. In contrast, bias-corrected term premia show pronounced countercyclical behavior, consistent with theoretical and empirical arguments about movements in risk premia. (JEL E31, E43, E52, G12, H63)

Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset

2011 ◽  
Vol 101 (4) ◽  
pp. 1514-1534 ◽  
Author(s):  
Jonathan H Wright
Keyword(s):  
Interest Rates ◽  
Empirical Evidence ◽  
Term Structure ◽  
Industrialized Countries ◽  
Bond Yields ◽  
Inflation Uncertainty ◽  
Term Structure Model ◽  
Forward Rates ◽  
International Panel ◽  
Term Premia

This paper provides cross-country empirical evidence on term premia. I construct a panel of zero-coupon nominal government bond yields spanning ten industrialized countries and nearly two decades. I hence compute forward rates and use two different methods to decompose these forward rates into expected future short-term interest rates and term premiums. The first method uses an affine term structure model with macroeconomic variables as unspanned risk factors; the second method uses surveys. I find that term premiums declined internationally over the sample period, especially in countries that apparently reduced inflation uncertainty by making substantial changes in their monetary policy frameworks. (JEL E13, E43, E52, G12, H63)

Uncertainty as a Propagating Force in The Great Depression

1994 ◽  
Vol 54 (4) ◽  
pp. 825-849 ◽  
Author(s):  
J. Peter Ferderer ◽  
David A. Zalewski
Keyword(s):  
Interest Rates ◽  
Great Depression ◽  
Term Structure ◽  
Risk Premium ◽  
Gold Standard ◽  
Significant Proportion ◽  
Banking Crises ◽  
The Great Depression ◽  
Aggregate Investment ◽  
Investment Spending

This article argues that the banking crises and collapse of the international gold standard in the early 1930s contributed to the severity of the Great Depression by increasing interest-rate uncertainty. Two pieces of evidence support this conclusion. First, uncertainty (as measured by the risk premium embedded in the term structure of interest rates) rises during the banking crises and is positively linked to financial-market volatility associated with the breakdown in the gold standard. Second, the risk premium explains a significant proportion of the variation in aggregate investment spending during the Great Depression.

Convexity Analysis of Option Embedded Bonds

2004 ◽  
Vol 12 (1) ◽  
pp. 23-49
Author(s):  
Seung Hyeon O
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Factor Model ◽  
Real Term ◽  
Interest Rate Risk ◽  
Vector Model ◽  
Convexity Property ◽  
Rate Risk ◽  
Bond Portfolio

Interest rate risk hedge strategies usually assume that term structure of interest rates in moving under a specific way. If a real term structure is moving differently from the assumed term structure movement, the interest rate risk hedge strategies assuming the special term structure movement may incur unexpected large loss for a bond portfolio manager. Hence an interest rate risk hedge strategy which could be effective under various types of term structure movements has been strongly needed by bond portfolio managers. Duration vector strategies have been developed to satisfy this practical need. To allow various types of term structure movements, duration vector strategies assume multi-factor models for the term structure movement. When a duration vector strategy is considered as a generalization of a duration strategy which is a single factor model for the term structure movement, there will be a generalized concept which measures convexity of a bond under the duration vector model. This study identifies the convexity property of an option embedded bond portfolio under ‘key rate duration model‘ which is a kind of duration vector model suggested by Ho (1992).

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