The Term Structure of Interest Rates: Theory, Models of Interest-Rate Forecasting, and Empirical Evidence

Abstract In this paper we deal with the financial sector of CANDIDE 1.1. We are concerned with the determination of the short-term interest rate, the term structure equations, and the channels through which monetary policy influences the real sector. The short-term rate is determined by a straightforward application of Keynesian liquidity preference theory. A serious problem arises from the directly estimated reduced form equation, which implies that the demand for high powered money, but not the demand for actual deposits, is a stable function of income and interest rates. The structural equations imply the opposite. In the term structure equations, allowance is made for the smaller variance of the long-term rates, but insufficient explanation is given for their sharper upward trend. This leads to an overstatement of the significance of the U.S. long-term rate that must perform the explanatory role. Moreover a strong structural hierarchy, by which the long Canada rate wags the industrial rate, is imposed without prior testing. In CANDIDE two channels of monetary influence are recognized: the costs of capital and the availability of credit. They affect the business fixed investment and housing sectors. The potential of the personal consumption sector is not recognized, the wealth and real balance effects are bypassed, the credit availability proxy is incorrect, the interest rate used in the real sector is nominal rather than real, and the specification of the housing sector is dubious.

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The Rising Cost of Climate Change: Evidence from the Bond Market

Review of Economics and Statistics ◽

10.1162/rest_a_01109 ◽

2021 ◽

pp. 1-45

Author(s):

Michael D. Bauer ◽

Glenn D. Rudebusch

Keyword(s):

Climate Change ◽

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Mitigation Strategies ◽

Social Cost Of Carbon ◽

Carbon Mitigation ◽

Interest Rate Models ◽

Real Rate ◽

The Social

Abstract Social discount rates (SDRs) are crucial for evaluating the costs of climate change. We show that the fundamental anchor for market-based SDRs is the equilibrium or steady-state real interest rate. Empirical interest rate models that allow for shifts in this equilibrium real rate find that it has declined notably since the 1990s, and this decline implies that the entire term structure of SDRs has shifted lower as well. Accounting for this new normal of persistently lower interest rates substantially boosts estimates of the social cost of carbon and supports a climate policy with stronger carbon mitigation strategies.

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

Przegląd Statystyczny ◽

10.5604/01.3001.0014.8494 ◽

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.

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

Debt Markets and Investments ◽

10.1093/oso/9780190877439.003.0012 ◽

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.

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Measuring Interest Rate Risk with Embedded Option Using HPL-MC Method in Fuzzy and Stochastic Environment

Journal of Mathematics ◽

10.1155/2020/7410909 ◽

2020 ◽

Vol 2020 ◽

pp. 1-13

Author(s):

Enlin Tang ◽

Wei Du

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Interest Rate Risk ◽

Extended Model ◽

Term Structure Model ◽

Continuous Innovation ◽

Liability Management ◽

Rate Risk ◽

Embedded Options

Under the condition of continuous innovation of financial derivatives and marketization of interest rate, interest rates fluctuate more frequently and fiercely, and the measurement of interest rate risk also attracts more attention. Under the premise that the fluctuation of interest rate follows fuzzy stochastic process, based on the option characteristics of financial instruments with embedded option, this paper takes effective duration and effective convexity as tools to measure interest rate risk when embedded options exist, tries to choose CIR extended model as term structure model, and uses the Monte Carlo method for hybrid low deviation sequences (HPL-MC) to analyze the prepayment characteristics of MBS, a representative financial instrument with embedded options, when interest rates fluctuate; on this basis, the effectiveness of effective duration management of interest rate risk is demonstrated with asset liability management cases of commercial banks.

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The term structure of interest rates and inflation forecast targeting

South African Journal of Economic and Management Sciences ◽

10.4102/sajems.v12i2.274 ◽

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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