We present a continuous extension of the recent Monte Carlo entropic method for sampling a density of states restricted in dimensionless macroscopic parameters. The method performs a random walk through a two-dimensional macrostate space... more
We present a continuous extension of the recent Monte Carlo entropic method for sampling a density of states restricted in dimensionless macroscopic parameters. The method performs a random walk through a two-dimensional macrostate space and provides complete ...
This study focused on the effect of interest rate policy on the growth of the Nigerian economy. It sought to assess the significance of interest rate, and to suggest measures that could enhance economic growth in Nigeria. To achieve the... more
This study focused on the effect of interest rate policy on the growth of the Nigerian economy. It sought to assess the significance of interest rate, and to suggest measures that could enhance economic growth in Nigeria. To achieve the objective of the research, some macroeconomic indicators in the Nigerian economy, using an ex-post facto research design were applied. The data were analyzed using the Ordinary Least Square (OLS) method. From the examination, it was uncovered that there was a huge connection between financing cost and GDP in Nigeria. It was additionally found that there was a huge connection between rate for currency exchange and total national output in Nigeria. Inflation was likewise found to significantly affect total national output in Nigeria. In light of these discoveries, it is suggested that the Central Bank of Nigeria (CBN) ought to structure policy framework on the rate of interest that will dependably support and encourage culture of savings in the real sector. This can be accomplished by expanding the rate accruing to savings from foreign and local investors. Additionally, aggregate economic output should be seen as the bane of government policy thrust, through bringing down of rate charged to lending and expanding rate to savings, as this improves financial development.
We test whether fixed-income investors can enhance returns by riding the yield curve, which involves purchasing securities with maturities longer than the investment horizon and selling them at the end of the investment horizon. The... more
We test whether fixed-income investors can enhance returns by riding the yield curve, which involves purchasing securities with maturities longer than the investment horizon and selling them at the end of the investment horizon. The results indicate that risk-adjusted returns are higher from riding the yield curve. The gains from riding can be increased further by using various conditioning rules to identify opportune times to use a yield-curve riding strategy.
The Nelson-Siegel-Svensson model is used for modelling the yield curve, even though many researchers have identified and reported different difficulties at the moment of calibrate the model, this is widely used by governments, Central... more
The Nelson-Siegel-Svensson model is used for modelling the yield curve, even though many researchers have identified and reported different difficulties at the moment of calibrate the model, this is widely used by governments, Central Banks, financial institutions around the world. In this sense, since our main purpose is to have a better understanding of the behaviour of the evolution of the yield curve based in the model proposed by Nelson-Siegel-Svensson in that way that it can allow us to know how it works, we have developed in the second section the Nelson-Siegel-Svensson model, in the third one we have described the flaws of the model like colinearity and finally in fourth one we introduce a numerical example based in real data from the chinese government bond market.
This is the first in a series of seven papers on interest rates and it covers the basic terms and information required for a fuller understanding of the significance of interest rates: the instruments that interest rates apply to, the... more
This is the first in a series of seven papers on interest rates and it covers the basic terms and information required for a fuller understanding of the significance of interest rates: the instruments that interest rates apply to, the bank interest margin which plays an important transmission role in monetary policy, time value of money, types, relationship between rates and prices, and other relevant issues. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.
Long-run and short-run inflation expectations indicate the quality of anchoring and central bank credibility for its inflations target and expected pass-through of inflationary shocks. In this paper we provide a comprehensive literature... more
Long-run and short-run inflation expectations indicate the quality of anchoring and central bank credibility for its inflations target and expected pass-through of inflationary shocks. In this paper we provide a comprehensive literature review and find that changes and credibility of policy targets are passed through long-run and short-run expectations while shocks affect mainly short-run expectations and influence long-run expectations if they are sequential and not-accommodated. We exemplify our hypothesizes by empirical models and find that short-term expectations compared to the medium-term have a weaker link to long-term expectations.
This is the fifth in a series of seven papers on interest rates and it covers the monetary policy models, a bank liquidity analysis, the concept of quantitative easing in terms of a bank liquidity analysis, and how a QE policy affects... more
This is the fifth in a series of seven papers on interest rates and it covers the monetary policy models, a bank liquidity analysis, the concept of quantitative easing in terms of a bank liquidity analysis, and how a QE policy affects interest rates. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.
This is the sixth in a series of seven papers on interest rates and it covers the various roles of interest rates: primary tool of monetary policy, bridge between present and future consumption, advancing consumption / investment with... more
This is the sixth in a series of seven papers on interest rates and it covers the various roles of interest rates: primary tool of monetary policy, bridge between present and future consumption, advancing consumption / investment with debt, interest rates’ inverse relationship with asset prices and the wealth effect, the role of interest rates in derivative instrument pricing, and interest rates’ role in foreign sector issues. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.
The recent international events attract the attention to study the behaviour of the credit market of a small open economy such as Mexico. The objective of this assignment is to assess the forecast from the term structure of the Mexican... more
The recent international events attract the attention to study the behaviour of the credit market of a small open economy such as Mexico. The objective of this assignment is to assess the forecast from the term structure of the Mexican government bonds using econometrics methods. Data analysis found that movement of short-term rates presents a higher volatility rather than long-term, bonds of different maturities tend to move towards the same direction and most often the term-structure has a positive slope. The empirical results show that, overall, adding more information as VAR models does produce better forecast performance than ARIMA, for short-term yields. Structural analysis suggests that domestic economic shocks, such as monetary policy and aggregate demand shocks, have a relevant influence over short-term bonds. Meanwhile international impacts are more important for the bonds at the high-end of the curve. Finally, although the economic outlook is unclear for the next year, the out-of-sample forecast exercise expects a positive slope of the yield curve in the next 12 months.
In this note we describe the HJM(LLM) model for pricing Mid-Curve Money Market Future Options. The model is based on assuming a lognormal process for the relevant forward money market (“LIBOR”) rates and imbedding it into the general... more
In this note we describe the HJM(LLM) model for pricing Mid-Curve Money Market Future Options. The model is based on assuming a lognormal process for the relevant forward money market (“LIBOR”) rates and imbedding it into the general no-arbitrage HJM interest rate modeling framework (understood in the most general sense as a manifestly self-consistent framework for formulating interest rate models in terms of any type of interest rate, including the observable market rates [2, 3, 4]). The relevant convexity adjustment factor is calculated by leveraging on the known functional form for the discount bond price volatility in any no-arbitrage lognormal “LIBOR” rate model, and approximating it with a leading order deterministic approximation. This makes it possible to derive an analytic expression for the HJM(LLM) model Discount Propagator using the path integral techniques and leads to the explicit analytic pricing formulas for the Mid-Curve futures options.
This paper provides a critical review of theories of term structure that employ the risk neutral pricing methodology. The methodology is shown to rely on arbitrage arguments that cannot be readily applied when pricing bonds. The major... more
This paper provides a critical review of theories of term structure that employ the risk neutral pricing methodology. The methodology is shown to rely on arbitrage arguments that cannot be readily applied when pricing bonds. The major conclusions of the paper are that the risk neutral pricing methodology cannot be applied when a bond is modeled as a derivative of the risk-free rate or asset; modeling a bond as the derivative of another bond does not satisfactorily address the problem of term structure; and the "perfect fit" models cannot be properly classified as theories of term structure.
This is the second in a series of seven papers on interest rates and it covers the relationship between the policy interest rate and the banks’ prime lending rate; the many, but related, interest rates on debt and deposits; the interbank... more
This is the second in a series of seven papers on interest rates and it covers the relationship between the policy interest rate and the banks’ prime lending rate; the many, but related, interest rates on debt and deposits; the interbank market interest rates; and the relationship of money market interest rates. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.
Superior modeling of the yield curve is useful for asset pricing, financial planning, and risk management. In this article, we estimate five affine term structure models using daily Colombian data. We find that a three-factor model... more
Superior modeling of the yield curve is useful for asset pricing, financial planning, and risk management. In this article, we estimate five affine term structure models using daily Colombian data. We find that a three-factor model outperforms the other models in one and five days ahead forecasts. The model’s factors closely mimic empirical proxies for the level, the slope, and the curvature of the Colombian yield curve.
Flower firms play significant role in Kenya economic growth; however, they face uncertain future on their operations due to overreliance on export earning which is affect by exchange rate fluctuation. The study sought to establish the... more
Flower firms play significant role in Kenya economic growth; however, they face uncertain future on their operations due to overreliance on export earning which is affect by exchange rate fluctuation. The study sought to establish the effect of foreign public debt on export earnings of flowers firms in Kenya. The study was guided by classical theory of public debt. The study used descriptive research design to evaluate connection between determinant exchange rate fluctuation and export earning of flower firm in Kenya. The study used both secondary and primary data. The study target population was 100 (accounts and finance managers) working with 30 registered flower firms in Kenya. The study employed structured questionnaires. The research instrument was pilot tested in two flower firms namely Sosian flower firm and Kitale Riverside Flowers before its administration for data collection in the main study. The data collected was subjected to relevant processing and analysis whereby the Statistical Package for Social Sciences (SPSS) software was analysis data. Descriptive statistics tools including mean, mode, standard deviation and variances were used. Inferential statistics in form of correlation and multiple regression analyses was also used to analyze data. The research hypotheses were tested at 0.05 level of significance. The study finding indicate that public debt has strong positively and statistically significant of (β 4 = 0.201, p<0.05) on export earnings of flower firms in Kenya. The study recommends that there is need for policy makers and Government to maintain optimal level of public debt in the country bearing in mind that they influence export earnings. This study will be useful to practitioners and policy makers through providing evidence which help in understanding factors affecting export earning of flower firms which will be important for management purpose and development of new policies.
This paper aims to prove which could be the best financing option for individuals with low incomes seeking sources of funding, depending on their profile and according to the available options in the national financial system,... more
This paper aims to prove which could be the best financing option for individuals with low incomes seeking sources of funding, depending on their profile and according to the available options in the national financial system, specifically through commercial banks and non-bank financial institutions. For that, we develop scenarios to show the benefits provided in each case, using a payments scheme with overdue annuities. The result shows a better choice to get loan through non-bank financial institutions.
Financial literature and financial industry use often zero coupon yield curves as input for testing hypotheses, pricing assets or managing risk. They assume this provided data as accurate. We analyse implications of the methodology and of... more
Financial literature and financial industry use often zero coupon yield curves as input for testing hypotheses, pricing assets or managing risk. They assume this provided data as accurate. We analyse implications of the methodology and of the sample selection criteria used to estimate the zero coupon bond yield term structure on the resulting volatility of spot rates with different maturities. We obtain the volatility term structure using historical volatilities and Egarch volatilities. As input for these volatilities we consider our own spot rates estimation from GovPX bond data and three popular interest rates data sets: from the Federal Reserve Board, from the US Department of the Treasury (H15), and from Bloomberg. We find strong evidence that the resulting zero coupon bond yield volatility estimates as well as the correlation coefficients among spot and forward rates depend significantly on the data set. We observe relevant differences in economic terms when volatilities are us...
The maturity effect states that the volatility of futures prices should increase as the contract approaches expiration. Numerous studies have investigated this effect for different asset classes. However, the presence of a maturity effect... more
The maturity effect states that the volatility of futures prices should increase as the contract approaches expiration. Numerous studies have investigated this effect for different asset classes. However, the presence of a maturity effect in short term interest rate (STIR) futures has usually only been studied considering these within a wider set of financial futures, without further consideration of their special features. Our study looks at the presence of maturity effects in STIR futures by analyzing the term structure of the volatility of the most worldwide traded contracts. It turns out that STIR futures behave differently to other assets and that an ‘inverse’ maturity effect, where volatility decreases as the contract approaches expiration, predominates. We propose to explain this phenomenon by relating the empirical evidence to the theoretical models of the volatility of the forward rates.
The interest rate is the chief target of monetary policy, and central banks have the ability to control short-term interest rates to the extent of almost 100%. Longer-term interest rates are anchored in short-term rates. The principal... more
The interest rate is the chief target of monetary policy, and central banks have the ability to control short-term interest rates to the extent of almost 100%. Longer-term interest rates are anchored in short-term rates. The principal interest rate targeted is the banks’ prime lending rate (PR) (which is a benchmark rate, ie all bank lending rates are referenced on PR). Why? Because new bank lending is the counterpart of money creation, and bank lending / money creation is a reflection of nominal GDP growth (government, companies and individuals borrow to undertake additional expenditure / investment). The purpose on monetary policy is to influence, via PR, the borrowers’ borrowing behaviour – the demand for credit. How do central banks control PR? They do so by setting their own lending rate to the banks, the policy interest rate (PIR), and by forcing the banks to borrow from the central bank at the PIR – or threatening to force the banks to borrow from it at the PIR. The PIR heavily influences market interest rates and ultimately the PR, and therefore the demand for credit.
This is the seventh in a series of seven papers on interest rates and it covers the Wicksell hypothesis, the general interpretation of it, an alternative interpretation, how the alternative interpretation is reconciled with the general... more
This is the seventh in a series of seven papers on interest rates and it covers the Wicksell hypothesis, the general interpretation of it, an alternative interpretation, how the alternative interpretation is reconciled with the general interpretation, and its fit with the Taylor rule. A modification to the Taylor rule is discussed. The seven papers cover: (1) what are interest rates?; (2) relationship of interest rates; (3) composition of interest rates; (4) interest rate discovery; (5) bank liquidity & interest rate discovery; (6) role of interest rates; (7) an optimal rate of interest: the natural rate.
We present a simple and fast iterative, linear algorithm for simultaneously stripping the coupon payments from and smoothing the yield curve of the term structure of interest rates. The method minimizes pricing errors, constrains initial... more
We present a simple and fast iterative, linear algorithm for simultaneously stripping the coupon payments from and smoothing the yield curve of the term structure of interest rates. The method minimizes pricing errors, constrains initial and terminal conditions of the curves and produces maximally smooth forward rate curves.
Indonesian government bond market has developed so rapidly, this study aims to investigate the factors that influence the term structure interest rate Indonesian government bonds (SUN). Yield spreads in this study using a long-term... more
Indonesian government bond market has developed so rapidly, this study aims to investigate the factors that influence the term structure interest rate Indonesian government bonds (SUN). Yield spreads in this study using a long-term government bonds (10 years) and short-term (3 months). The study examines the macro economic factors consist of the consumer price index (CPI), industry production index (IPI), the money supply (M2), exchange rate rupiah to U.S. dollar (KURS), interest rate (BIR),and jakarta composite index (IHSG) for the period July 2003 to December 2011. The research shows that YS influenced by the CPI and BI Rate
This paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long-term interest rates and inflation when the latter is subject to a targeting policy by the Central Bank. Two... more
This paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long-term interest rates and inflation when the latter is subject to a targeting policy by the Central Bank. Two competing models that econometrically describe agents’ inferences about inflation targets are developed and shown to generate distinct predictions on the behavior of
We present a stochastic-market-risk extension of a popular doubly mean-reverting Vasicek model. The model straddles the P and Q measures. By allowing for a stochastic market price of risk, we break the determinstic link between the... more
We present a stochastic-market-risk extension of a popular doubly mean-reverting Vasicek model. The model straddles the P and Q measures. By allowing for a stochastic market price of risk, we break the determinstic link between the return-predicting factor and the market-price of risk, but we retain, on average, the observed regularities reported in the literature. We also show how the model can be calibrated.
