Oil price shock in the US and the euro area – evidence from the shadow rate and the term premium

The aim of this article is to investigate the consequences of oil price changes for the economy of the US and the euro area. Oil price transmission channel is assessed using Granger causalities and structural vector autoregressive (VAR) specifications (applying the Cholesky factorization and the restrictions following the method of Blanchard and Quah). The conventional oil price transmission channel is extended by a shadow policy rate and term premium, as the importance of both indicators has been growing rapidly in recent years. The results confirm that the oil price shock is not negligible in the aftermath of the Global Financial Crisis and in the subsequent period of monetary policy normalization. The findings are confirmed by the outcomes of the Bayesian VAR specification with sign restrictions. The consequences of changes in oil prices have significantly grown since the introduction of unconventional monetary instruments. The magnitude of the response of industrial production, price level and shadow interest rate to the oil price shock is strongest in the period corresponding to the unconventional monetary policy. In many cases, however, the reaction is short-lived. The conventional instrument (policy rate) in the euro area has still not been sufficient to stabilize the economy in the recent period of monetary policy normalization in the US.

The Yield Curve as a Predictor of Economic Activity in Mexico: The Role of the Term Premium

Este trabajo analiza si existe una relación entre la pendiente de la curva de rendimientos y la actividad económica futura en México para el período 2004-2019. En particular, se evalúa si dicha relación depende de la prima de plazo. Para este propósito, se estima un modelo de umbral en el cual la relación entre la curva de rendimientos y la actividad económica futura, medida ya sea como el crecimiento del producto o como la probabilidad de una contracción, depende de si la prima por plazo se encuentra por encima o por debajo de un umbral estimado. Los resultados principales indican que la pendiente de la curva de rendimientos parece anticipar el comportamiento de la actividad económica solo cuando la prima por plazo se encuentra por encima de un umbral. Los resultados también sugieren que la pendiente de la curva de rendimientos tiene poder predictivo sobre la probabilidad de enfrentar una contracción en el futuro solo cuando la prima por plazo está por encima de un umbral. El valor estimado para dicho umbral depende del horizonte de pronóstico y la medida de la actividad económica.

Secular Economic Changes and Bond Yields

We build a model of bond yields in an economy with secular changes to inflation, real rate and output growth. Long-run restrictions identify nominal shocks that do not influence the long-run real rate and output growth. Before the anchoring of inflation around the mid-1990s, nominal shocks lifted the output gap and inflation. This led to a higher and steeper yield curve because the short rate was expected to peak after several quarters, following declines in the responses of growth and inflation. With inflation anchored, nominal shocks have small impacts on inflation, output and bond yields, mostly via the term premium.

Zombies on the Brink

How does unconventional monetary policy affect corporate capital structure and investment decisions? We study the transmission channel of quantitative easing and its potential diminishing returns on investment from a corporate finance perspective. Using a rich bank-firm matched data of Japanese firms with information on corporate debt and investment, we study how firms adjust their capital structure in response to the changes in term premia. Investment responds positively to a reduction in the term premium on average. However, there is a significant degree of cross-sectional variation in firm response: healthier firms increase capital spending and cash holdings, while financially vulnerable firms take advantage of lower long-term yields to refinance without increasing investment.

Modeling the volatility of DJIM equity indices: a fundamental analysis using quantile regression

Purpose This paper aims to investigate the behavior of volatility of Islamic equity indices toward fundamental risk factors. It focuses on the degree and structure of sensitivity to commodity price changes, global risk perception and term premium and whether crises and fragility periods have shaped the degree and structure of this sensitivity. Design/methodology/approach Quantile regression incorporating structural changes and GARCH-class model are used to establish how sensitivities are varying across volatility distribution depending on global events. The data are daily series of return indices, over the period spanning from January 1, 2001 until January 22, 2018. Findings The results show significant sensitivity to fundamental factors. The sensitivity is identified for different regional indices and intensified across quantiles. Speculation has shaped the structure of sensitivity at normal time, but correction holds at time of crisis. The results reveal that even if they share common features, commodities cannot be considered as homogeneous asset class. Indeed, the exact relationship cannot be observed at normal time in presence of speculation and information delay. However, at time of financial fragility and periods of crisis, the sensitivity is assigned with the plausible sign. Practical implications The obtained results present several policy implications as well for academics, portfolio managers and policy-makers. It opens new research paths for academic research, it helps in investment decisions, provides lessons for portfolio diversification, both for price discovery and hedging. The results serve as well to implement effective macroeconomic stabilization policies and even fiscal policies to counteract any inflationary impact of fundamental price changes on investors and Islamic banks. Originality/value This paper contributes to empirical literature by dealing with the sensitivity of Islamic equity indices to commodity prices and term premium along with the effect of investor sentiment. It pays attention to the financial stability of Islamic stock markets by investigating the sensitivity at normal time, during fragility periods and periods of crisis. It considers the financialization process of commodity markets and includes the term premium to control for rational expectations on term structure of interest rates and the VIX (Volatility index) as global risk perception to control for safety and risk aversion.