RETURN-PREDICTING FACTORS FOR US TREASURIES: ON THE SIMILARITY OF "TENTS" AND "BATS"

2015 ◽  
Vol 18 (04) ◽  
pp. 1550028 ◽  
Author(s):  
RICCARDO REBONATO
Keyword(s):  
Time Dependent ◽  
Forward Rate ◽  
Excess Returns ◽  
Forward Rates ◽  
Simple Transformation ◽  
Predicting Factors ◽  
Dependent Term ◽  
Slope Factor ◽  
Separate Source ◽  
Term Premia

Different authors find optically very different patterns ("tents" and "bats") when excess returns from US Treasuries are regressed against forward rates. A separate source of disagreement is whether the recent tent-shaped factor found by Cochrane & Piazzesi (2004, 2005, 2008) is fundamentally different from the slope (in yields) explanatory factor for the time-dependent term premia that has been identified since the early 1990s. We show that "tent" and "bat" patterns produce predictions of excess returns that are economically indistinguishable, both locally and globally. We also argue that, if the slope (in yield space) is indeed the most important explanatory factor for excess returns, then a simple transformation of the loadings of the forwards rates on the slope factor naturally recovers an approximate tent shape in forward-rate space. However, a transformation from a slope factor in yields to loadings for forward rates does not easily produce a bat pattern. This may provide indirect corroboration to Cochrane & Piazzesi's (2004) claim that the bat factor is a result of near colinearity for smoothed data, and that the "tent" solution is intrinsically different from the "bat" solution.

FORWARD-RATE VOLATILITIES AND THE SWAPTION MATRIX: WHY NEITHER TIME-HOMOGENEITY NOR TIME-DEPENDENCE ARE ENOUGH

2006 ◽  
Vol 09 (05) ◽  
pp. 705-746 ◽  
Author(s):  
RICCARDO REBONATO
Keyword(s):  
Markov Chain ◽  
Market Volatility ◽  
Time Dependent ◽  
Forward Rate ◽  
Systematic Analysis ◽  
Option Markets ◽  
Markov Chain Approach ◽  
Major Market ◽  
Volatility Model

This work presents the first systematic analysis of the whole swaption matrix by fitting a parsimonious, nonlinear, financially-inspired volatility model to market data. The study uses several years of data spanning period of major market volatility. We find that the quality of the fits is good (on average of the same magnitude as the bid-offer spread), and better when a displaced-diffusion approach is chosen, but some systematic shortcomings are observed and discussed. The analysis suggests that a two-regime Markov chain approach may be more successful and better financially motivated. More generally, the present study highlights the shortcomings of purely time-dependent or time-homogenous approaches. These findings should be applicable to other option markets as well. Finally, we find that the present (nonlinear) model vastly outperforms PCA-based approaches when in comes to predicting moves in implied volatilities.

COMMONWEALTH PERSPECTIVE ON PETROLEUM TAXATION

1999 ◽  
Vol 39 (2) ◽  
pp. 126
Author(s):  
B. Layer
Keyword(s):  
Risk Premium ◽  
Petroleum Industry ◽  
Forward Rate ◽  
Gas Transfer ◽  
Development Activity ◽  
Resource Rent ◽  
Forward Rates ◽  
North West ◽  
Percentage Points

In 1997 the petroleum industry sought modifications to the petroleum resource rent tax (PRRT) regime which applies to all Commonwealth offshore areas except the North West Shelf Project area. Industry argued that the PRRT impeded deepwater exploration and development activity and the exploitation of large stranded gas deposits suitable for conversion to liquids such as LNG. Industry suggested that a more appropriate risk/reward balance in the tax structure could be achieved by providing a volume based PRRT exemption for projects located in water depth greater than 400 m and by increasing the uplift rates for unrealised losses. It was proposed that the risk premium for the general (development) expenditure carry forward rate be increased by five percentage points to the long term bond rate (LTRR) plus 10 percentage points. Another industry recommendation was that exploration expenditures incurred more than five years before the issue of a production license (PL), which currently attract the lower GDP factor rate (the five year rule), be uplifted at the long-term bond rate for the period prior to the five year mark and then rolled forward at LTBR plus 15 percentage points. In addition, industry asked that the reference date for the five year rule should be based on the application date for a PL and not the issue date. For integrated gas to liquid projects, industry requested clarification of the basis for valuing feedstock gas for determining gas liability.In response, the Commonwealth decided to adopt a gas transfer price (GTP) methodology based on a combination of established cost plus and net back formulas to be applied to the up and downstream stages of the project respectively. The difference in the price outcome of the two methods, the residual price, is split 50:50 to obtain the GTP. Details of how the residual price method will be applied are currently being finalised with a view to enacting legislation in 1999-2000. The Commonwealth also responded positively to the industry suggestion that the reference date of the five year rule be applied from the date of application for the PL on the proviso that the appropriate authority receives all information pertaining to a successful application. Recommended changes to the PRRT for deepwater areas and proposed increases to the carry forward rates of undeducted losses were rejected mainly on economic efficiency grounds.

scholarly journals CDO TERM STRUCTURE MODELLING WITH LÉVY PROCESSES AND THE RELATION TO MARKET MODELS

2012 ◽  
Vol 15 (01) ◽  
pp. 1250008 ◽  
Author(s):  
THORSTEN SCHMIDT ◽  
JERZY ZABCZYK
Keyword(s):  
Term Structure ◽  
Forward Rate ◽  
Collateralized Debt Obligations ◽  
Top Down ◽  
Market Models ◽  
Forward Rates ◽  
Finite Dimensional ◽  
Generalized Framework ◽  
Collateralized Debt ◽  
Absence Of Arbitrage

This paper considers the modelling of collateralized debt obligations (CDOs). We propose a top-down model via forward rates generalizing Filipović, Overbeck and Schmidt (2009) to the case where the forward rates are driven by a finite dimensional Lévy process. The contribution of this work is twofold: we provide conditions for absence of arbitrage in this generalized framework. Furthermore, we study the relation to market models by embedding them in the forward rate framework in spirit of Brace, Gatarek and Musiela (1997).

scholarly journals A Quantum Field Theory Term Structure Model Applied to Hedging

2003 ◽  
Vol 06 (05) ◽  
pp. 443-467 ◽  
Author(s):  
Belal E. Baaquie ◽  
Marakani Srikant ◽  
Mitch C. Warachka
Keyword(s):  
Field Theory ◽  
Quantum Field Theory ◽  
Term Structure ◽  
Theory Model ◽  
Forward Rate ◽  
Quantum Field ◽  
Structure Model ◽  
Term Structure Model ◽  
Forward Rates ◽  
Low Dimensional

A quantum field theory generalization, Baaquie [1], of the Heath, Jarrow and Morton (HJM) [10] term structure model parsimoniously describes the evolution of imperfectly correlated forward rates. Field theory also offers powerful computational tools to compute path integrals which naturally arise from all forward rate models. Specifically, incorporating field theory into the term structure facilitates hedge parameters that reduce to their finite factor HJM counterparts under special correlation structures. Although investors are unable to perfectly hedge against an infinite number of term structure perturbations in a field theory model, empirical evidence using market data reveals the effectiveness of a low dimensional hedge portfolio.

Determination of the Forward Rate of Dissolution for SON68 and PAMELA Glasses in Contact With Alkaline Solutions

2008 ◽  
Vol 1107 ◽  
Author(s):  
K. Ferrand ◽  
K. Lemmens
Keyword(s):  
Waste Glass ◽  
Forward Rate ◽  
Alkaline Solutions ◽  
Dynamic Tests ◽  
Forward Rates ◽  
Rate Of Dissolution ◽  
Uv Visible ◽  
Radionuclide Release ◽  
Good Agreement

AbstractIn the new Belgian disposal design, the nuclear waste glass will be surrounded by a 3 cm thick carbon steel overpack and a 70 cm thick concrete buffer. An initially high pH is expected after water intrusion in the concrete buffer and this may have an effect on the radionuclide release from the waste glass. This study was performed in order to determine the forward rate of dissolution for SON68 and PAMELA glasses (SM513 LW11 and SM539 HE 540-12), conducting dynamic tests at 30°C in contact with alkaline solutions. In these experiments, the silicon concentration in solution was determined by UV/Visible spectrophotometry according to the blue â-silicomolybdenum method. The forward rates of dissolution were quite similar for the three glasses except at the highest pH for which a slightly higher value was found for SM539 glass. For SON68 glass, a good agreement with the previously established interpolation law was observed until pH 11.5, but at higher pH, the interpolation law slightly overestimates the dissolution rate [1].

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