The term structure of Eurozone peripheral bond yields: an asymmetric regime-switching equilibrium correction approach

2019 ◽  
Vol 24 (4) ◽  
Author(s):  
Christos Avdoulas ◽  
Stelios Bekiros ◽  
Brian Lucey
Keyword(s):  
Term Structure ◽  
Regime Switching ◽  
Yield Curve ◽  
Bond Yields ◽  
Short Term ◽  
Economic Implications ◽  
Expectations Hypothesis ◽  
The Difference ◽  
The Business Cycle ◽  
Equilibrium Correction

AbstractSeveral studies have established the predictive power of the yield curve i.e. the difference between long and short-term bond rates and the role of asymmetries in the term structure of bond yields with respect to real economic activity. Using an extensive dataset, comprising 3-month, 1-year, 5-year and 10-year constant maturity Treasury bonds for the Eurozone southern periphery countries – the so-called “PIIGS” – from January 1999 to April 2019, we investigate the links between bond yields of different maturities for the Eurozone southern peripheral countries and we find they co-evolve in line with the predictions of the Expectations Hypothesis theory. We demonstrate the presence of nonlinearities in the term structure, and utilize a multivariate asymmetric two-regime Markov-switching VAR methodology to model them properly. Moreover, we address the economic reasoning behind the introduction of an equilibrium-correction regime-switching approach, hence providing potentially important insights on the behaviour of the entire yield curve. We reveal that the regime shifts are related to the state of the business cycle, particularly in economies in which monetary policy decisions are implemented via changes in short-term rates as a response to deviations of output from equilibrium levels. Our results may have important statistical and economic implications on the behaviour of the term structure of bond yields.

A Consumption Based Term Structure Model w ith Habit Utility

2018 ◽  
Vol 9 (6) ◽  
pp. 484-496
Author(s):  
Jun Lou ◽  
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Bond Yields ◽  
Expectations Hypothesis ◽  
Term Structure Model ◽  
Bond Risk Premia ◽  
The Interest Rate ◽  
Bond Risk

This paper proposes a term structure of interest rates model that modifies and extends the Campbell and Cochrane (1999) surplus consumption framework. The distinguishing contributions are tractable, continuous-time analytical solutions for the term structure of interest rate generating a realistic upward sloping yield curve. Despite the focus on the term structure, the model matches plausible equity quantities. For the interest rate, the model is able to account for the moments of bond yields at numerous maturities and produce countercyclical bond risk premia as seen in the data. Moreover, the model captures reasonable time series fluctuation on real interest rates. However, the model has difficulties reproducing empirical deviations from the expectations hypothesis.

scholarly journals The Explanatory Power Of The Yield Curve In Predicting Recessions In South Africa

2013 ◽  
Vol 12 (6) ◽  
pp. 613 ◽  
Author(s):  
Tjhaka Alphons Mohapi ◽  
I Botha
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Explanatory Power ◽  
Economic Recession ◽  
Probit Model ◽  
Bond Yields ◽  
Term Spread ◽  
The Difference ◽  
Dynamic Probit Model

The term structure of interest rates, particularly the term spreaddetermined from the difference between ten-year government bond yields andthree-month Treasury bill yields, has received increased attention as avaluable forecasting tool for the purposes of monetary policy and recessionforecasting. This is on the back of the observed positive relationship betweenterm spread and economic activity. Moreover, the term spread has been observedto invert prior to the occurrence of economic recessions both in developed anddeveloping countries.This study investigated the forecasting ability of the South African(S.A.) term spread in predicting S.A. recessions, taking into account therecent global economic recession. The motivation is due to the forecastingconsistencies illustrated by the term spread in providing statisticallyincorrect signals of recession in 2003, which did not transit into reality. Itimplied a weak relationship between the S.A. term spread and economic activity.Moreover, based on observations from the literature that term spreads andeconomic activities across countries are correlated, the term spreads of China,United States (U.S.) and Germany were investigated and compared to the S.A.term spread to determine which better forecasts S.A. recessions. The studyemployed the Dynamic Probit Model since it is considered to provide a betterpredictive edge over the Traditional Static Probit model.The findings revealed that the S.A. term spread accurately predicted allthe S.A recessions since 1980; Chinese term spread accurately predicted the1996 and 2008 S.A recessions; U.S. term spread predicted some recessions; whileGerman term spread predictions were counter-cyclical.

scholarly journals Does The Expectations Hypothesis Explain The Term Structure Of Treasury Bond Yields In Tunisia?

2015 ◽  
Vol 32 (1) ◽  
pp. 239
Author(s):  
Jamel Boukhatem
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Aggregate Demand ◽  
Bond Market ◽  
Bond Yields ◽  
Monthly Data ◽  
Expectations Hypothesis ◽  
Cointegrated Var ◽  
Treasury Bond ◽  
One Year

<p><em>This paper tests the expectations hypothesis (EH) using monthly data for Treasury bond yields (TBYs) over the period 1994m5–2014m12 and ranging in maturity from one year to 10 years. We apply cointegrated-VAR jointly on more than one pair of yields. The results suggest rejection of the EH throughout the medium maturity spectrum. However, for longer maturities they suggest the validity of the EH for the TBYs. This indeed confirms the smooth functioning of Tunisian bond market which gives an indication that the yield curve should serve as an indicator to the monetary policymakers to manage inflation and to influence the aggregate demand in the economy.</em></p><p><strong> </strong></p>

Term Structure Models

2017 ◽  
Author(s):  
Kerry E. Back
Keyword(s):  
Term Structure ◽  
Yield Curve ◽  
Model Parameters ◽  
Bond Yields ◽  
Expectations Hypothesis ◽  
Forward Rates ◽  
Affine Models ◽  
Deterministic Function ◽  
Root Model ◽  
Quadratic Models

Bond yields and forward rates are defined. The fundamental PDE is derived. Affine term strucure models are explained, including the Vasicek model and the Cox‐Ingersoll‐Ross square root model. Gaussian affine models, completely affine models, and multifactor CIR models are explained. Quadratic models are described. The various versions of the expectations hypothesis are explained. We can fit a given yield curve by adding a deterministic function of time to an interest rate model or allowing model parameters to be time varying. Heath‐Jarrow‐Morton models are explained, and it is shown that drifts of forward rates under the risk neutral probability are determined by their volatilities.

A Note Concerning the Dynamics of Government Bond Yields

2021 ◽  
pp. 056943452098827
Author(s):  
Tanweer Akram
Keyword(s):  
Interest Rate ◽  
Financial Markets ◽  
Yield Curve ◽  
Empirical Studies ◽  
State Theory ◽  
Government Bond ◽  
Bond Yields ◽  
Short Term ◽  
Government Bonds

Keynes argued that the central bank can influence the long-term interest rate on government bonds and the shape of the yield curve mainly through the short-term interest rate. Several recent empirical studies that examine the dynamics of government bond yields not only substantiate Keynes’s view that the long-term interest rate responds markedly to the short-term interest rate but also have relevance for macroeconomic theory and policy. This article relates Keynes’s discussions of money, the state theory of money, financial markets, investors’ expectations, uncertainty, and liquidity preference to the dynamics of government bond yields for countries with monetary sovereignty. Investors’ psychology, herding behavior in financial markets, and uncertainty about the future reinforce the effects of the short-term interest rate and the central bank’s monetary policy actions on the long-term interest rate. JEL classifications: E12; E40; E43; E50; E58; E60; F30; G10; G12; H62; H63

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.

The Dividend Term Structure

2019 ◽  
Vol 55 (3) ◽  
pp. 829-867 ◽  
Author(s):  
Jac Kragt ◽  
Frank de Jong ◽  
Joost Driessen
Keyword(s):  
Business Cycle ◽  
Term Structure ◽  
Factor Model ◽  
Market Returns ◽  
Short Term ◽  
Latent Factors ◽  
Stock Market Returns ◽  
Financial Variables ◽  
Limited Degree ◽  
The Business Cycle

We estimate a model for the term structure of discounted risk-adjusted dividend growth using prices of dividend futures for the Eurostoxx 50. A 2-factor model capturing short-term mean reversion within a year and a medium-term component reverting at the business-cycle horizon gives an excellent fit of these prices. Hence, investors update the valuation of dividends beyond the business cycle only to a limited degree. The 2-factor model, estimated on dividend futures data only, explains a large part of observed daily stock market returns. We also show that the 2 latent factors are related to various economic and financial variables.

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