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.

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 natural yield curve in Brazil

2019 ◽  
Vol 17 (4) ◽  
pp. 1
Author(s):  
Adonias Evaristo Da Costa Filho
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Phillips Curve ◽  
Yield Curve ◽  
Output Gap ◽  
Natural Rate ◽  
Natural Rate Of Interest ◽  
Natural Counterpart ◽  
The Difference ◽  
Highly Correlated

<p>This paper estimates the term structure of natural interest rates for Brazil, a generalization of the concept of natural rate of interest for the yield curve. First, the Diebold-Li (2006) model is estimated with real yields. The latent factors of this model are then used in a model that includes an IS and a Phillips curve. The natural yield curve is obtained as the level, slope and curvature that closes the output gap at each point in time. This decomposition allows a broader indicator of the stance of monetary policy and a real-time measure of the natural rate. The difference between the slope of the real curve and its natural counterpart is highly correlated with the output gap.</p>

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.

scholarly journals Variables Explaining Bank Stock Prices

2010 ◽  
Vol 26 (4) ◽  
Author(s):  
Jimmy D. Moss ◽  
Gisele J. Moss
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Stock Prices ◽  
Yield Curve ◽  
Stock Index ◽  
Stock Market Volatility ◽  
Explanatory Variables ◽  
Bank Stock ◽  
The Difference ◽  
The Relationship

<p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="color: black; font-size: 10pt;"><span style="font-family: Times New Roman;">The purpose of this study is to examine the relationship between an index of bank common stock prices and a variety of explanatory variables including interest rates on Treasury securities of various maturities and other economic variables.<span style="mso-spacerun: yes;">&nbsp; </span>We also examine the relationship between the term structure of interest rates and bank stock prices.<span style="mso-spacerun: yes;">&nbsp; </span>A sample of week ending values of the bank stock index is used as a proxy for the bank industry.<span style="mso-spacerun: yes;">&nbsp; </span>The weekly closing interest rates for the 13-week Treasury bill, 5-year Treasury note, 10-year Treasury note and the 30-year Treasury bond are used in the study.<span style="mso-spacerun: yes;">&nbsp; </span>Other data used were the U.S. dollar index, the CRB index, the price of gold, the S&amp;P500 stock index, the VIX stock market volatility index and a measure of the yield curve.<span style="mso-spacerun: yes;">&nbsp; </span>Data was taken from January 1998 through November 2009.<span style="mso-spacerun: yes;">&nbsp; </span>Therefore, a total of approximately 620 cases of weekly observations are included in the study.<span style="mso-spacerun: yes;">&nbsp; </span>In order to study the effects of term structure of interest rates on bank stock prices, we take the difference between the 10-year Note and the 13-week Bill.<span style="mso-spacerun: yes;">&nbsp; </span>All variables are converted to a stationary series by taking first differences of each series.<span style="mso-spacerun: yes;">&nbsp; </span>Multiple linear regression is then used to study the variables that can explain bank stock prices.<span style="mso-spacerun: yes;">&nbsp; </span>A stepwise procedure was used to identify those variables with the strongest relationships in a multi-variable equation. <span style="mso-spacerun: yes;">&nbsp;</span>Three independent variables were found with an R-squared of 0.619.<span style="mso-spacerun: yes;">&nbsp; </span>The results of this study corroborate previous studies and have practical implications for investors and for bank managers.</span></span></p>

scholarly journals Yield curve dynamics with macroeconomic factors in Iberian economies

2020 ◽  
Vol 10 (3) ◽  
pp. 193-203
Author(s):  
Isabel Maldonado ◽  
Carlos Pinho
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Error Variance ◽  
Impact Factors ◽  
Strong Impact ◽  
Impulse Response Functions ◽  
Macroeconomic Factors ◽  
Vector Autoregressive ◽  
Future Evolution

Abstract The aim of this paper is to analyse the bidirectional relation between the term structure of interest rates components and macroeconomic factors. Using a factor augmented vector autoregressive model, impulse response functions and forecasting error variance decompositions we find evidence of a bidirectional relation between yield curve factors and the macroeconomic factors, with increased relevance of yield factors over it with increased forecasting horizons. The study was conduct for the two Iberian countries using information of public debt interest rates of Spain and Portugal and macroeconomic factors extracted from a set of macroeconomic variables, including indicators of activity, prices and confidence. Results show that the inclusion of confidence and macroeconomic factors in the analysis of the relationship between macroeconomics and interest rate structure is extremely relevant. The results obtained allow us to conclude that there is a strong impact of changes in macroeconomic factors on the term structure of interest rates, as well as a significant impact factors of the term structure in the future evolution of macroeconomic factors.

Does the slope of the yield curve of the interbank market influence prices on the Warsaw Stock Exchange? A sectoral perspective

2021 ◽  
Vol 67 (4) ◽  
pp. 294-307
Author(s):  
Ewa Majerowska ◽  
Jacek Bednarz
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Stock Exchange ◽  
Rate Curve ◽  
Daily Data ◽  
Warsaw Stock Exchange ◽  
The Interest Rate ◽  
Relationship Of

The interest rate curve is often viewed as the leading indicator of economic prosperity in a broad sense. This paper studies the ability of the slope of the yield curve in the term structure of interest rates to impact the sectoral indices on the Warsaw Stock Exchange, using daily data covering the period from 1 January 2001 to 30 September 2020. The results of the research indicate an ambiguous dependence of the logarithmic rates of return of sub-indices on the change of the interbank interest rate curve. The only sectors showing a clear relationship of this type is energy and pharmaceuticals.

Yield Curves, Swap Curves, and Term Structure of Interest Rates

2019 ◽  
pp. 203-228
Author(s):  
Tom P. Davis ◽  
Dmitri Mossessian
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Yield Curve ◽  
Yield Curves ◽  
No Arbitrage ◽  
Interest Rate Swap ◽  
The Interest Rate ◽  
Rate Swap ◽  
The U.S

This chapter discusses multiple definitions of the yield curve and provides a conceptual understanding on the construction of yield curves for several markets. It reviews several definitions of the yield curve and examines the basic principles of the arbitrage-free pricing as they apply to yield curve construction. The chapter also reviews cases in which the no-arbitrage assumption is dropped from the yield curve, and then moves to specifics of the arbitrage-free curve construction for bond and swap markets. The concepts of equilibrium and market curves are introduced. The details of construction of both types of the curve are illustrated with examples from the U.S. Treasury market and the U.S. interest rate swap market. The chapter concludes by examining the major changes to the swap curve construction process caused by the financial crisis of 2007–2008 that made a profound impact on the interest rate swap markets.

scholarly journals A Nonparametric Approach to Bond Portfolio Immunization

Mathematics ◽  
2019 ◽  
Vol 7 (11) ◽  
pp. 1121
Author(s):  
Victor Lapshin
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Best Practice ◽  
Yield Curve ◽  
Model Parameters ◽  
Dimensional Manifold ◽  
Nonparametric Approach ◽  
Hedging Portfolio ◽  
Practice Approach ◽  
Low Dimensional

We consider the problem of short term immunization of a bond-like obligation with respect to changes in interest rates using a portfolio of bonds. In the case that the zero-coupon yield curve belongs to a fixed low-dimensional manifold, the problem is widely known as parametric immunization. Parametric immunization seeks to make the sensitivities of the hedged portfolio price with respect to all model parameters equal to zero. However, within a popular approach of nonparametric (smoothing spline) term structure estimation, parametric hedging is not applicable right away. We present a nonparametric approach to hedging a bond-like obligation allowing for a general form of the term structure estimator with possible smoothing. We show that our approach yields the standard duration based immunization in the limit when the amount of smoothing goes to infinity. We also recover the industry best practice approach of hedging based on key rate durations as another particular case. The hedging portfolio is straightforward to calculate using only basic linear algebra operations.

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.

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