Unspanned Risks, Negative Local Time Risk Premiums, and Empirical Consistency of Models of Interest-Rate Claims

2019 ◽  
Author(s):  
Gurdip S. Bakshi ◽  
John Crosby ◽  
Xiaohui Gao
Keyword(s):  
Interest Rate ◽  
Local Time ◽  
Risk Premiums

EFFECT OF ASSET VALUE CORRELATION ON CREDIT-LINKED NOTE VALUES

2002 ◽  
Vol 05 (05) ◽  
pp. 455-478 ◽  
Author(s):  
C. H. HUI ◽  
C. F. LO
Keyword(s):  
Interest Rate ◽  
Credit Risk ◽  
Structural Model ◽  
Credit Spreads ◽  
Model Parameters ◽  
Risk Premiums ◽  
Closed Form Solutions ◽  
Asset Values ◽  
Dependent Model ◽  
Payoff Condition

This paper develops a simple model to study the credit risk premiums of credit-linked notes using the structural model. Closed-form solutions of credit risk premiums of the credit-linked notes derived from the model as functions of firm values and the short-term interest rate, with time-dependent model parameters governing the dynamics of the firm values and interest rate. The numerical results show that the credit spreads of a credit-linked note increase non-linearly with the decrease in the correlation between the asset values of the note issuer and the reference obligor when the final payoff condition depends on the asset values of the note issuer and the reference obligor. When the final payoff condition depends on the recovery rate of the note issuer upon default, the credit spreads could increase with the correlation. In addition, the term structures of model parameters and the correlations involving interest rate are clearly the important factors in determining the credit spreads of the notes.

The PPP View of Multihorizon Currency Risk Premiums

2020 ◽  
Author(s):  
Mikhail Chernov ◽  
Drew Creal
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Weak Form ◽  
Nominal Exchange Rate ◽  
Discount Factor ◽  
Stochastic Discount Factor ◽  
Current Interest ◽  
Yield Curves ◽  
Risk Premiums ◽  
Nonmonotonic Function

Abstract Exposures of expected future nominal depreciation rates to the current interest rate differential violate the UIP hypothesis in a pattern that is a nonmonotonic function of horizon. Forward expected nominal depreciation rates are monotonic. We explain the two patterns by simultaneously incorporating the weak form of PPP into a joint model of the stochastic discount factor, the nominal exchange rate, and domestic and foreign yield curves. Departures from PPP generate the first pattern. The risk premiums for these departures generate the second pattern. Thus, the variance of the stochastic discount factor is related to the real exchange rate.

scholarly journals The Pure Expectations Theory and Quarterly Interest Rate Premiums

2017 ◽  
Vol 7 (1) ◽  
pp. 161
Author(s):  
Samih Antoine Azar
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Risk Premium ◽  
Sampling Error ◽  
Small Sample ◽  
Short Term ◽  
Risk Premiums ◽  
Sample Bias ◽  
Conditional Tests ◽  
The Difference

The expectations theory posits that the long interest rate is an average of expected short term interest rates with the possibility of the existence of a risk premium. This paper looks upon fourteen samples of investments for which the difference in maturity is three months. All yields are actual yields and are adjusted to have the same maturities as the short rate. The evidence is strong for the pure expectations theory which predicts that the risk premiums are zero. This should not be surprising because the premium that we are looking for is merely 4 basis points per quarter. The contribution of this paper, besides giving support to the pure expectations theory, is to lay out the fundamental and basic methodology that one should follow in order to study other investments similar to ours. Both unconditional and conditional tests are performed. Because of sampling error and small-sample bias the unconditional tests may be preferable. 

scholarly journals Asset Pricing Model (CAPM) in Emerging Markets: Evidence in BRICS nations and comparisons with other G20

2019 ◽  
Vol 11 (2) ◽  
pp. 162-175
Author(s):  
Cláudio Francisco Rezende ◽  
Vinícius Silva Pereira ◽  
Antonio Sergio Torres Penedo
Keyword(s):  
Asset Pricing ◽  
Interest Rate ◽  
Risk Premium ◽  
Fixed Effects ◽  
Interest Rate Risk ◽  
Pricing Model ◽  
Risk Premiums ◽  
Asset Pricing Model ◽  
Rate Risk ◽  
The Interest Rate

The objective of this paper is to empirically investigate the applicability of the asset pricing model in a portfolio made up of groups of countries, the G20 for this case. In the meantime, it was intended to compare a complete sample of 14 constituent countries of the group, a subsample of four countries belonging to the BRICS and another of the countries that do not belong. The survey sample consisted of long-term interest rate data from these countries collected in the OECD database and also from the Central Bank of Brazil (Bacen). Based on the results of the regression of Panel data on fixed effects, we found evidence that there is a statistically positive relationship between the market risk premium and the interest rate risk premiums. The regression betas showed that the interest rate risk premium is not sensitive when considering the full sample of the G20 countries but is sensitive in the BRICS sample.

scholarly journals Evaluating the existence of structural change in the Brazilian term structure of interest rate: evidence based on Hansens cointegration models with structural break

2014 ◽  
Vol 8 (2) ◽  
pp. 211
Author(s):  
Emerson F. Marcal ◽  
Pedro L. Valls Pereira
Keyword(s):  
Structural Change ◽  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Risk Premium ◽  
Structural Break ◽  
Sample Period ◽  
Data Set ◽  
Risk Premiums ◽  
Vector Autoregressive

This paper investigates whether there is evidence of struc- tural change in the Brazilian term structure of interest rates. Multivari- ate cointegration techniques are used to verify this evidence. An econo- metric model is estimated which is a Vector Autoregressive Model with Error Correction Mechanism (VECM) with abrupt structural change formulated by Hansen [13]. Two datasets were analysed. The rst one contains a nominal interest rate with maturity up to three years. The second data set focuses on maturity up to one year. The rst data set focuses on a sample period from 1995 to 2010 and the second from 1998 to 2010. The frequency is monthly. The estimated models suggest the existence of structural change in the Brazilian term structure. It was possible to document the existence of multiple regimes using the tech- nique for both databases. The risk premium for dierent spreads varied considerably during the earliest period of both samples and seemed to converge to stable and lower values at the end of the sample period. Long-term risk premiums seemed to converge to international stand- ards, although the Brazilian term structure is still subject to liquidity problems for longer maturities.

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