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

We examine the macro-spanning hypothesis for bond returns in international markets. Based on a large panel of real-time macroeconomic variables that are not subject to revisions, we find that global macro factors have predictive power for bond returns unspanned by yield factors. Furthermore, we estimate macro-finance term structure models with the unspanned global macro factors and find that the global macro factors influence the market prices of level and slope risks and induce comovements in forward term premia in global bond markets. This paper was accepted by David Simchi-Levi, finance.

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Forecasting Term Structure of Interest Rates in Japan

International Journal of Financial Studies ◽

10.3390/ijfs7030039 ◽

2019 ◽

Vol 7 (3) ◽

pp. 39 ◽

Cited By ~ 1

Author(s):

Ishii

Keyword(s):

Financial Crisis ◽

Interest Rates ◽

Term Structure ◽

Bond Markets ◽

Forecast Horizon ◽

Forecast Performance ◽

Crisis Period ◽

Long Period ◽

The U.S ◽

Dns Model

In this paper, we examined and compared the forecast performances of the dynamic Nelson–Siegel (DNS), dynamic Nelson–Siegel–Svensson (DNSS), and arbitrage-free Nelson–Siegel (AFNS) models after the financial crisis period. The best model for the forecast performance is the DNSS model in the middle and long periods. The AFNS is inferior to the DNS model for long-period forecasting. In U.S. bond markets, AFNS is shown to be superior to DNS in the U.S. However, for Japanese data, there is no evidence that the AFNS is superior to the DNS model in the long forecast horizon.

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Inter-dependencies among Asian bond markets

Studies in Economics and Finance ◽

10.1108/sef-11-2015-0273 ◽

2017 ◽

Vol 34 (4) ◽

pp. 485-505 ◽

Cited By ~ 1

Author(s):

Sowmya Subramaniam ◽

Krishna P. Prasanna

Keyword(s):

Term Structure ◽

Yield Curve ◽

Factor Model ◽

Dynamic Factor ◽

Bond Markets ◽

Content Type ◽

Monetary Authorities ◽

Asian Economies ◽

Regional Factors

Purpose The purpose of the paper is to investigate the global and regional influences on the domestic term structure of nine Asian economies. Design/methodology/approach The dynamic Nelson Siegel model was used to extract the latent factors of a country’s yield curve movements in a state-space framework using the Kalman filter. The global and regional factors of the yield curve were extracted using the dynamic factor model. Further, the Bayesian inference of Gibbs sampling approach was used to identify the influence of global and regional factors on the domestic yield curve. Findings The results suggest that financial integration does not reduce the control of monetary authorities on the front end of the yield curve, and long-term interest rate is the potential transmission channel through which the contagion of the financial crisis spreads. Practical implications The results of this study would help the monetary authorities to understand the efficacy of the monetary policy transmission mechanism. It also offers the global investors diversification opportunities for investing in the Asian bond markets. Originality/value It is one of the earliest attempts to capture the global and regional yield curve movements and their impact on the emerging Asian economies yield curve. It contributes to literature by identifying the linkages in the long-term factor that is the potential channel through which crisis spreads.

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

Management Science ◽

10.1287/mnsc.2020.3757 ◽

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.

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Brazilian term structure of interest rate modeling: A Nelson-Siegel approach

Corporate Ownership and Control ◽

10.22495/cocv14i1c3p2 ◽

2016 ◽

Vol 14 (1) ◽

pp. 414-432

Author(s):

Adalto Barbaceia Gonçalves ◽

Felipe Tumenas Marques

Keyword(s):

Interest Rates ◽

Term Structure ◽

Future Research ◽

Model Parameters ◽

Extensive Literature ◽

Bond Markets ◽

Fixed Rate ◽

Yield Curves ◽

Vec Model ◽

Parsimonious Models

Forecasting interest rates structures plays a fundamental role in the fixed income and bond markets. The development of dynamic modeling, especially after Nelson and Siegel (1987) work, parsimonious models based in a few parameter shed light over a new path for the market players. Despite the extensive literature on the term structure of interest rates modeling and the existence in the Brazilian market of various yield curves from different traded asset classes, the literature focused only in the fixed rate curve. In this work we expand the existing literature on modeling the term structure of Brazilian interest rates evaluating all the yield curves of Brazilian market using the methodology proposed by Nelson and Siegel. We use Non Linear Least Squares (NLLS) to estimate the model parameters for almost 10 years of monthly data and model these parameters with the traditional VAR/VEC model. The results show that it is possible to estimate the Nelson Siegel model for the Brazilian curves. It remains for future research the modeling of their variances as well as the possibility to develop a global Brazilian model using Kalman Filter using the Diebold. Li. and Yue (2006) approach.

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AN EMPIRICAL ANALYSIS OF BOND MARKETS AND THEIR IMPLICATIONS FOR THE TERM STRUCTURE OF INTEREST RATES

Manchester School ◽

10.1111/j.1467-9957.1980.tb00715.x ◽

1980 ◽

Vol 48 (2) ◽

pp. 111-125 ◽

Cited By ~ 1

Author(s):

L. N. CHRISTOFIDES

Keyword(s):

Interest Rates ◽

Empirical Analysis ◽

Term Structure ◽

Bond Markets

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Extracting inflation risk premium from nominal and real bonds using survey information

Journal of Economic Studies ◽

10.1108/jes-03-2017-0066 ◽

2018 ◽

Vol 45 (2) ◽

pp. 307-325

Author(s):

José Vicente ◽

Daniela Kubudi

Keyword(s):

Survey Data ◽

Term Structure ◽

Risk Premium ◽

Estimation Procedure ◽

Joint Model ◽

Bond Markets ◽

Yield Curves ◽

Content Type ◽

Inflation Expectation ◽

Inflation Forecasting

Purpose The purpose of this paper is to forecast future inflation using a joint model of the nominal and real yield curves estimated with survey data. The model is arbitrage free and embodies incompleteness between the nominal and real bond markets. Design/methodology/approach The methodology is based on the affine class of term structure of interest rate. The model is estimated using the Kalman filter technique. Findings The authors show that the inclusion of survey data in the estimation procedure improves significantly the inflation forecasting. Moreover, the authors find that the monetary policy has significant effects on the inflation expectation and risk premium. Originality/value This paper is the first to estimate inflation using a joint model of nominal and real yield curves with Brazilian data. Moreover, the authors propose a simple arbitrage-free model that takes it account incompleteness between the nominal and real bond markets.

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