This study investigates how interest rate deregulation affects firms' financing choice between bank debt and public debt. Our analysis exploits China's 2013 bank interest rate floor deregulation as ...an exogenous shock to the supply of bank credit. Using a difference-in-difference design, we find that firms with higher default risk substitute away from bank loan and switch to public debt after the 2013 deregulation. However, this substitution to public debt is limited, leading to a dramatic decline in debt ratio. Our result also demonstrates that the effect on firms' public debt financing is more pronounced for firms with better information environments, suggesting that good information environment is an important prerequisite for making the switch. This switching, contradicting to traditional financing framework that high-risk firms prefer bank loans, inevitably is costly. Compared with low-risk firms, bonds issued by high-risk firms have significantly higher spreads, a higher likelihood of being secured, and a higher tendency of including an interest-adjusted clause. More importantly, we also document that high-risk firms subsequently improve their information transparency after the interest rate deregulation. Our findings highlight the role of interest rate deregulation in firms' financing choice and illustrate that firms incur high switching costs when their choice deviates from the optimal financing choice.
•After the interest rate floor deregulation high-risk firms substitute away from bank loan and switch to public debt.•This effect is stronger for firms with better information environment.•However, this substitution is limited, leading to a decline in debt level.•This switching, contradicting to traditional financing framework that high-risk firms prefer bank loans, inevitably is costly.•To facilitate financing, high-risk firms subsequently improve their information transparency.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NLZOH, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UILJ, UL, UM, UPCLJ, UPUK, ZAGLJ, ZRSKP
Assuming that the volatility process follows the uncertain Cox–Ingersoll–Ross (CIR) model, this paper presents a new version of the uncertain exponential Ornstein–Uhlenbeck interest rate model. The ...prices of the interest rate ceiling and the interest rate floor based on the model are derived using the Yao–Chen formula. Some algorithms are designed to calculate the prices of these derivatives numerically. We present some numerical experiments which illustrate the behaviour of the proposed model.
The Bank of Japan has introduced various unconventional monetary policy tools since the launch of Abenomics in 2013, to achieve the price stability target of 2 percent inflation. In this paper, a ...forward-looking open-economy general equilibrium model with endogenously determined policy credibility and an effective lower bound is developed for forecasting and policy analysis (FPAS) for Japan. In the model's baseline scenario, the likelihood of the Bank of Japan reaching its 2 percent inflation target over the medium term is below 40 percent, assuming the absence of other policy reactions aside from monetary policy. The likelihood of achieving the inflation target is even lower under alternative risk scenarios. A positive shock to central bank credibility increases this likelihood, and would require less accommodative macroeconomic policies.
The non-negativity constraint on nominal interest rates may have been a major factor behind a putative structural break in the effectiveness of monetary policy. To check for the existence of such a ...break without making prior assumptions about timing, and to enable comparison between pre- and post-break monetary policy, we employ an identified Markov switching VAR framework. Estimation results support the existence of a structural break around the time when the de facto zero nominal interest rate policy was resumed and the effectiveness of monetary policy is seen to weaken since then although slightly positive effects from monetary easing still exist.
J. Japanese Int. Economies
20 (3) (2006) 434–453.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a ...two-country general-equilibrium simulation model calibrated to the Japanese economy vis-à-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding.
J. Japanese Int. Economies
20 (4) (2006) 665–698.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
This paper examines the possible effects on Switzerland of asset preference shifts in favor of Swiss franc-denominated assets that could result from European Economic and Monetary Union (EMU). ...Alternative policy responses to temporary and persistent asset preference shifts and the consequent pressures for exchange rate appreciation are examined. Simulations of a stylized macroeconomic model of the Swiss economy indicate that monetary policy is likely to be the most effective tool for stabilizing output in the short run, but at the cost of a temporary increase in inflationary pressures. The simulations highlight the dilemmas faced by policymakers in an environment with low levels of inflation and nominal interest rates.
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GEOZS, IJS, IMTLJ, KILJ, KISLJ, NUK, OILJ, PNG, SAZU, SBCE, SBJE, UL, UM, UPCLJ, UPUK
The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a ...two-country general-equilibrium simulation model calibrated to the Japanese economy vis-à-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding.
The standard approach to calculating credit valuation adjustment (CVA) involves the use of a Monte Carlo simulation to calculate the expected exposure as this is the most general solution and allows ...the impact of close‐out netting to be fully included. Nevertheless there is a place for analytic models, although they are limited compared to the general solution provided by Monte Carlo models. A limited number of analytic solutions are available for the CVA of single derivatives. This chapter derives these, and covers interest rate swaps, interest rate caps and floors and FX forwards. As most of these formulae are for trades on a standalone basis, the CVA calculation will not be correct for more than one transaction in given netting set. Analytic CVA formulae are frequently used as a point of comparison for Monte Carlo models and sometimes used in pricing where performance is critical.
Interest Rate Floors Subramani, R. Venkata
Accounting for Investments,
2011, 2012-01-02
Book Chapter
Interest rate floors are a form of interest rate derivatives, which are over‐the‐counter derivatives that protect the holder from declines in short‐term interest rates by making a payment to the ...buyer when an underlying reference rate falls below a specified rate, known as the floor rate or the strike rate. The holder of a floor instrument pays a premium for protection against decline in interest rates. If the reference rate is below the floor rate, the payment is calculated with reference to the difference between the two rates, the length of the period, and the notional amount of the contract. Interestingly, interest rate floors are of two types—the first type being “to pay.” This means that for receiving an agreed premium, the buyer of this type of instrument agrees to compensate the seller of the instrument on the pay date any interest falling below the floor rate. However, the second type of interest rate floors is known as “to receive.” This means that for paying an agreed premium, the seller of this type of instrument agrees to compensate the buyer of the instrument on the pay date any interest below the floor rate.
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