Term spread regressions of the rational expectations hypothesis of the term structure allowing for risk premium effects

2015 ◽  
Vol 19 (1) ◽  
Author(s):  
Efthymios Argyropoulos ◽  
Elias Tzavalis
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Rational Expectations ◽  
Time Varying ◽  
Structure Model ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Term Spread ◽  
Term Premium

AbstractThis paper suggests a new empirical methodology of testing the predictions of the term spread between long and short-term interest rates about future changes of the former allowing for term premium effects, according to the rational expectations hypothesis of the term structure. To capture the effects of a time-varying term premium on the term spread, the paper relies on an empirically attractive affine Gaussian dynamic term structure model which assumes that the term structure of interest rates is spanned by three unobserved state variables. To retrieve accurate values of these variables from interest rates series, the paper suggests a new method which can overcome the effects of measurement (or pricing) errors inherent in these series on the estimates of the model. This method is assessed by a Monte Carlo study. Ignoring these errors will lead to biased estimates of term structure models. The empirical results of the paper provide support for the suggested term structure model. They show that this model can efficiently capture the time-varying term premium effects embodied in long-term interest rates, which can explain the failures of term spread to forecast future changes in long-term rates.

scholarly journals What does a term structure model imply about very long-term interest rates?

2021 ◽  
Vol 62 ◽  
pp. 202-219
Author(s):  
Anne G. Balter ◽  
Antoon Pelsser ◽  
Peter C. Schotman
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Structure Model ◽  
Term Structure Model

scholarly journals Term Structure Forecasts of Long-Term Consumption Growth

2005 ◽  
Vol 40 (2) ◽  
pp. 241-258 ◽  
Author(s):  
Andrea Berardi ◽  
Walter Torous
Keyword(s):  
Term Structure ◽  
Structure Data ◽  
Growth Rates ◽  
Structure Model ◽  
Sample Period ◽  
State Variables ◽  
Consumption Growth ◽  
Term Structure Model ◽  
Term Spread

AbstractRelying on a simple general equilibrium model of the term structure, we show that both nominal yields and real consumption growth rates can be affine in the unobservable state variables. We can then express real consumption growth rates in terms of nominal yields rather than the unobservable state variables with the coefficients of the resultant forecasting relation being endogenously determined by the term structure model. Using term structure data over the 1985 to 2000 sample period, the empirical evidence is consistent with our model more accurately predicting real consumption growth rates than a regression model based on the term spread.

Monetary Transmission in the Term Structure of Interest Rates in Spain (1995-2003)

2021 ◽  
Vol 26 (1) ◽  
pp. 279-292
Author(s):  
María A. Prats ◽  
Gloria M. Soto
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Rational Expectations ◽  
Transmission Mechanism ◽  
Monetary Transmission ◽  
Var Model ◽  
Expectations Hypothesis ◽  
Weak Evidence ◽  
One Year ◽  
The One

The aim of this paper is to investigate whether the effectiveness of the transmission mechanism of monetary  policy in Spain has changed since EMU establishment. The analysis is based on the fulfillment of the Expectations Hypothesis under rational expectations and the methodology is implemented through a  cointegrated  bivariate VAR model. The results reveal the existence of  monetary transmission in the term structure in the  period prior to EMU, even though the evidence is stronger up to the one-year rate. From 1999, the results are   only consistent with a weak evidence of monetary transmission.

scholarly journals The term structure of interest rates and inflation forecast targeting

2011 ◽  
Vol 12 (2) ◽  
pp. 162-179
Author(s):  
Eric Schaling ◽  
Willem Verhagen ◽  
Sylvester Eiffinger
Keyword(s):  
Interest Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Term Structure ◽  
Inflation Targeting ◽  
Nominal Interest Rate ◽  
Term Spread ◽  
State Of The Economy ◽  
Output Persistence

This paper examines the implications of the expectations theory of the term structure of interest rates for the implementation of inflation targeting. We show that the responsiveness of the central bank’s instrument to the underlying state of the economy is increasing in the duration of the long-term bond.  On the other hand, an increase in duration will make long-term inflationary expectations - and therefore also the long-term nominal interest rate - less responsive to the state of the economy. The extent to which the central bank is concerned with output stabilisation will exert a moderating influence on the central bank’s response to leading indicators of future inflation. However, the effect of an increase in this parameter on the long-term nominal interest rate turns out to be ambiguous. Next, we show that both the sensitivity of the nominal term spread to economic fundamentals and the extent to which the spread predicts future output, are increasing in the duration of the long bond and the degree of structural output persistence. However, if the central bank becomes relatively less concerned about inflation stabilisation the term spread will be less successful in predicting real economic activity.

scholarly journals A term structure model under cyclical fluctuations in interest rates

2018 ◽  
Vol 72 ◽  
pp. 140-150 ◽  
Author(s):  
Manuel Moreno ◽  
Alfonso Novales ◽  
Federico Platania
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Structure Model ◽  
Term Structure Model ◽  
Cyclical Fluctuations

Pricing KTB Futures: An Application of Black-Karasinski Model

2002 ◽  
Vol 10 (2) ◽  
pp. 1-23
Author(s):  
Jang Gu Kang ◽  
Jeong Jin Lee
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Futures Contracts ◽  
Structure Model ◽  
Market Prices ◽  
Interest Rate Derivatives ◽  
Term Structure Model ◽  
Cost Of Carry ◽  
The Cost ◽  
Very High

Traditionally, people values KTB futures contracts using the model based on the cost-of-carry argument. However, the underlying commodity for the KTB futures is non-tradable, and so the cost of carry argument cannot be applied to the KTB futures. This paper regards KTB futures contracts as interest-rate derivatives, and prices them using the Black-Karasinski (B-K) term structure model. This paper documents that (1) the market prices of KTB futures are more close to B-K model price than the price by the cost-of-carry argument, though the KTB futures are generally underpriced in the market even under the B-K model; (2) The extent of underpricing is a decreasing function of the remaining maturity of the futures, and becomes smaller recently; (3) The cost of carry argument relatively overprices the KTB futures, and the degree of overpricing is a decreasing function of interest rates and the remaining maturity of the futures; (4) The daily resettlement in the futures contracts affects the futures price very little; (5) The trading strategies based on the theoretical pricing models produce very high trading profit.

scholarly journals Accounting for Low Long-Term Interest Rates: Evidence from Canada

2020 ◽  
pp. 1.000-72.000
Author(s):  
Jens H. E. Christensen ◽  
◽  
Glenn D. Rudebusch ◽  
Patrick J. Shultz ◽  
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Inflation Expectations ◽  
Real Rate ◽  
Inflation Risk ◽  
Risk Premiums ◽  
Term Structure Model ◽  
Sovereign Credit Risk ◽  
Debt Market

In recent decades, long-term interest rates around the world have fallen to historic lows. We examine this decline using a dynamic term structure model of Canadian nominal and real yields with adjustments for term, liquidity, and inflation risk premiums. Canada provides a useful case study that has been little examined despite its established indexed debt market, negligible distortions from monetary quantitative easing or the zero lower bound, and no sovereign credit risk. We find that since 2000, the steady-state real interest rate has fallen by more than 2 percentage points, long-term inflation expectations have edged down, and real bond and inflation risk premiums have fluctuated but shown little longer-run trend. Therefore, the drop in the equilibrium real rate appears largely to account for the lower new normal in interest rates.

scholarly journals Testes da Hipótese de Expectativas na Estrutura a Termo das Taxas de Juros Brasileiras

2003 ◽  
Vol 1 (1) ◽  
pp. 19
Author(s):  
Benjamin Miranda Tabak ◽  
Sandro Canesso de Andrade
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Term Structure ◽  
Risk Premium ◽  
Rational Expectations ◽  
Yield Curve ◽  
Single Equation ◽  
Expectations Hypothesis ◽  
Macro Modeling ◽  
Daily Data

We test the Expectations Hypothesis (EH) plus Rational Expectations (RE) in the Brazilian term-structure of interest rates, using maturities ranging from 1 month to 12 months, and daily data from 1995 to 2000. We rely on two methodologies based on single-equation regressions. Our results indicate a rejection of the EH plus RE, specially at the longer maturity. This may have important implications for the rational expectations macro-modeling currently being used to evaluate the conduct of monetary policy in Brazil. We also show the risk premium in the yield curve are positively related to the covered interest rate differential and to the volatility of interest rates.

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