A Priching Model for Inflation-indexed Bonds

2011 ◽  
Vol 19 (2) ◽  
pp. 175-206
Author(s):  
Sang Su Kim
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Cross Section ◽  
Complex Structure ◽  
Principal Component ◽  
Stochastic Property ◽  
Pricing Model ◽  
Indexed Bonds ◽  
Nominal Interest Rates ◽  
Fisher Hypothesis

This paper derives the theoretical price of nominal bonds and inflation-indexed bonds through extracting the factors, which are assumed that their stochastic property follows the standard O-U process, in the term structure of nominal interest rates and yields of inflation-indexed bonds by the Principal Component Analysis (PCA). In particular, through reflecting the complex structure of inflation-indexed bonds by accurately applying theoretical price, it brought differentiation from other literatures, and applied this pricing model to Japanese Government Inflation-indexed Bond (JGB) data. The empirical results of above model show that explanation of time series and cross section of Janpan's real and nominal interest rates were outstanding and was found that Fisher hypothesis was rejected in further

scholarly journals INTEREST RATES, FISHER EFFECT AND ECONOMIC DEVELOPMENT IN TURKEY, 1989-2011

2016 ◽  
Vol 25 (2) ◽  
pp. 95-100
Author(s):  
Selahattin GÜR?? ◽  
Burak GÜR?? ◽  
Turgut ÜN
Keyword(s):  
Economic Development ◽  
Interest Rates ◽  
Test Validity ◽  
Threshold Cointegration ◽  
Fisher Effect ◽  
Empirical Results ◽  
Distributed Lag ◽  
Leading Indicator ◽  
Nominal Interest Rates ◽  
Fisher Hypothesis

This paper investigates the validity of the Fisher Hypothesis in Turkey coveringthe period 2003 – 2012. To test validity of Fisher Hypothesis, this paper uses anAutoregressive Distributed Lag test for threshold cointegration recently introduced in theliterature by Li and Lee (2010). The empirical results which are obtained from this paperindicate that Fisher hypothesis is valid for Turkey, meaning nominal interest rates wouldbe an important leading indicator for inflation.

scholarly journals Social Security Benefit Valuation, Risk, and Optimal Retirement

Risks ◽  
2019 ◽  
Vol 7 (4) ◽  
pp. 124
Author(s):  
Yassmin Ali ◽  
Ming Fang ◽  
Pablo A. Arrutia Sota ◽  
Stephen Taylor ◽  
Xun Wang
Keyword(s):  
Social Security ◽  
Interest Rates ◽  
Term Structure ◽  
Principal Component ◽  
Disease Diagnosis ◽  
Cash Flows ◽  
Future Research ◽  
Demographic Groups ◽  
Numerical Studies ◽  
Future Research Directions

We develop valuation and risk techniques for the future benefits of a retiree who participates in the American Social Security program based on their chosen date of retirement, the term structure of interest rates, and forecasted life expectancy. These valuation methods are then used to determine the optimal retirement time of a beneficiary given a specific wage history and health profile in the sense of maximizing the present value of cash flows received during retirement years. We then examine how a number of risk factors including interest rates, disease diagnosis, and mortality risks impact benefit value. Specifically, we utilize principal component analysis in order to assess both interest rate and mortality risk. We then conduct numerical studies to examine how such risks range over distinct income and demographic groups and finally summarize future research directions.

Disappointment Aversion, Term Structure, and Predictability Puzzles in Bond Markets

2020 ◽  
Author(s):  
Patrick Augustin ◽  
Roméo Tédongap
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Dynamic Equilibrium ◽  
Time Varying ◽  
State Variables ◽  
Expectations Hypothesis ◽  
Macroeconomic Uncertainty ◽  
Disappointment Aversion ◽  
Nominal Interest Rates ◽  
Continuous State

We solve a dynamic equilibrium model with generalized disappointment-aversion preferences and continuous state-endowment dynamics. We apply the framework to the term structure of interest rates and show that the model generates an upward-sloping term structure of nominal interest rates and a downward-sloping term structure of real interest rates and that it accounts for the failure of the expectations hypothesis. The key ingredients are preferences with disappointment aversion, preference for early resolution of uncertainty, and an endowment economy with three state variables: time-varying macroeconomic uncertainty, time-varying expected inflation, and inflation uncertainty. This paper was accepted by Karl Diether, finance.

Pricing Risks Across Currency Denominations

2019 ◽  
Vol 65 (12) ◽  
pp. 5308-5336 ◽  
Author(s):  
Thomas A. Maurer ◽  
Thuy-Duong Tô ◽  
Ngoc-Khanh Tran
Keyword(s):  
Interest Rates ◽  
Stock Returns ◽  
Cross Section ◽  
Principal Component ◽  
Sharpe Ratio ◽  
Global Risk ◽  
Discount Factors ◽  
Risk Sources ◽  
The Cross ◽  
Fx Market

We use principal component analysis on 55 bilateral exchange rates of 11 developed currencies to identify two important global risk sources in foreign exchange (FX) markets. The risk sources are related to Carry and Dollar but are not spanned by these factors. We estimate the market prices associated with the two risk sources in the cross-section of FX market returns and construct FX market-implied country-specific stochastic discount factors (SDFs). The SDF volatilities are related to interest rates and expected carry trade returns in the cross-section. The SDFs price international stock returns and are related to important financial stress indicators and macroeconomic fundamentals. The first principal risk is associated with the Treasury-EuroDollar (TED) spread, quantities measuring volatility, tail and contagion risks, and future economic growth. It earns a relatively small implied Sharpe ratio. The second principal risk is associated with the default and term spreads and quantities capturing volatility and illiquidity risks. It further correlates with future changes in the long-term interest rate and earns a large implied Sharpe ratio. This paper was accepted by Lauren Cohen, finance.

ACCURATE OF VAR CALCULATED USING EMPIRICAL MODELS OF THE TERM STRUCTURE

2009 ◽  
Vol 12 (06) ◽  
pp. 811-832 ◽  
Author(s):  
PILAR ABAD ◽  
SONIA BENITO
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Confidence Level ◽  
Value At Risk ◽  
Principal Component ◽  
Empirical Models ◽  
Two Dimensions ◽  
Parametric Models ◽  
Equal Weight ◽  
Moving Averages

This work compares the accuracy of different measures of Value at Risk (VaR) of fixed income portfolios calculated on the basis of different multi-factor empirical models of the term structure of interest rates (TSIR). There are three models included in the comparison: (1) regression models, (2) principal component models, and (3) parametric models. In addition, the cartography system used by Riskmetrics is included. Since calculation of a VaR estimate with any of these models requires the use of a volatility measurement, this work uses three types of measurements: exponential moving averages, equal weight moving averages, and GARCH models. Consequently, the comparison of the accuracy of VaR estimates has two dimensions: the multi-factor model and the volatility measurement. With respect to multi-factor models, the presented evidence indicates that the Riskmetrics model or cartography system is the most accurate model when VaR estimates are calculated at a 5% confidence level. On the contrary, at a 1% confidence level, the parametric model (Nelson and Siegel model) is the one that yields more accurate VaR estimates. With respect to the volatility measurements, the results indicate that, as a general rule, no measurement works systematically better than the rest. All the results obtained are independent of the time horizon for which VaR is calculated, i.e. either one or ten days.

scholarly journals Title: analysis of term structure of interest rates in Latin America countries from 2006 to 2014

2015 ◽  
Vol 13 (4) ◽  
pp. 650
Author(s):  
Felipe Stona ◽  
Jean Amann ◽  
Maurício Delago Morais ◽  
Divanildo Triches ◽  
Igor Clemente Morais
Keyword(s):  
Latin America ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Principal Component ◽  
Vector Model ◽  
Yield Curves ◽  
Macroeconomic Factors ◽  
The Relationship ◽  
Latin America Countries

This article aims to investigate the relationship between the term structure of interest rates and macroeconomic factors in selected countries of Latin America, such as Brazil, Chile and Mexico, between 2006 and 2014, on an autoregressive vector model. Specifically, we perform estimations of Nelson-Siegel, Diabold-Li and principal component analysis to test how the change of macroeconomic factors, e.g. inflation, production and unemployment levels affect the yield curves. For Brazil and Mexico, GDP and inflation variables are relevant to change the yield curves, with the former shifting more the level, and the latter with greater influence on the slope. For Chile, inflation had the greatest impact on the level and, specifically for Mexico, the unemployment variable also changed the slope of the yield curve.

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