Term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small-sample bias. We show that accounting for this bias alters the conclusions about the ...trend, cycle, and macroeconomic determinants of the term premia estimated in Wright (2011). His term premium estimates are essentially acyclical, and often just parallel the secular trend in long-term interest rates. In contrast, bias-corrected term premia show pronounced countercyclical behavior, consistent with theoretical and empirical arguments about movements in risk premia.
•We build a quantitative DSGE model to simultaneously study the three principal tools of unconventional monetary policy - quantitative easing, forward guidance, and negative interest ...rates.•Endogenous quantitative easing via a feedback rule can largely mitigate the costs of a binding zero lower bound.•We discuss implications of large central bank balances for quantitative tightening and the efficacy of negative interest rate policy.
We develop a structural DSGE model to systematically study the principal tools of unconventional monetary policy – quantitative easing (QE), forward guidance, and negative interest rate policy (NIRP) – as well as the interactions between them. To generate the same output response, the requisite NIRP and forward guidance interventions are twice as large as a conventional policy shock, which seems implausible in practice. In contrast, QE via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound. Quantitatively, QE1-QE3 can account for two thirds of the observed decline in the “shadow” Federal Funds rate. In spite of its usefulness, QE does not come without cost. A large balance sheet has consequences for different normalization plans, the efficacy of NIRP, and the effective lower bound on the policy rate.
Mortgage Risk and the Yield Curve Malkhozov, Aytek; Mueller, Philippe; Vedolin, Andrea ...
The Review of financial studies,
05/2016, Letnik:
29, Številka:
5
Journal Article
Recenzirano
Odprti dostop
We study feedback from the risk of outstanding mortgage-backed securities (MBS) on the level and volatility of interest rates. We incorporate supply shocks resulting from changes in MBS duration into ...a parsimonious equilibrium dynamic term structure model and derive three predictions that are strongly supported in the data: (1) MBS duration positively predicts nominal and real excess bond returns, especially for longer maturities; (2) the predictive power of MBS duration is transitory in nature; and (3) MBS convexity increases interest rate volatility, and this effect has a hump-shaped term structure.
In this study, we propose an implementation of the multifactor Heath-Jarrow-Morton (HJM) interest rate model using an approach that integrates principal component analysis (PCA) and Monte Carlo ...simulation (MCS) techniques. By integrating PCA and MCS with the multifactor HJM model, we successfully capture the principal factors driving the evolution of short-term interest rates in the US market. Additionally, we provide a framework for deriving spot interest rates through parameter calibration and forward rate estimation. For this, we use daily data from the US yield curve from June 2017 to December 2019. The integration of PCA, MCS with multifactor HJM model in this study represents a robust and precise approach to characterizing interest rate dynamics and compared to previous approaches, this method provided greater accuracy and improved understanding of the factors influencing US Treasury Yield interest rates.
This paper investigates the effects of various monetary policy instruments in China with the structural vector autoregression model. Empirical results are as follows. The effects of benchmark lending ...rate and short‐term interest rate shocks are larger than those of reserve requirement ratio shocks. Nonpolicy shocks exert substantial effects on intermediate targets under a quantity‐based policy framework. The size and effects of short‐term interest rate shocks in recent years are large. Short‐term interest rate shocks have strong effects on property prices. These results suggest that the new interest rate‐based policy framework is more effective than the previous quantity‐based policy framework.
ABSTRACT
We quantify the impact of risk‐based and nonrisk‐based intermediary constraints (IC) on the term structure of covered interest rate parity (CIP) violations. Using a stochastic discount ...factor (SDF) inferred from interest rate swaps, we value currency derivatives. The wedge between model‐implied and observed derivative prices reflects the impact of nonrisk‐based IC because our SDF incorporates risk‐based IC. There is no wedge at short horizons, while the wedge accounts for 40% of long‐term CIP violations. Consistent with IC theory, the wedge correlates with the shadow cost of intermediary capital, and the SDF‐implied interest rate is a weighted average of collateralized and uncollateralized interest rates.
The Secured Overnight Funding Rate (SOFR) has become the risk‐free rate benchmark in US dollars, thus term structure models should reflect key features exhibited by SOFR and forward rates implied by ...SOFR futures. We construct a multifactor, stochastic volatility term structure model which incorporates these features. Calibrating to options on SOFR futures, we achieve a reasonable fit to the market across maturities and strikes in a single model. This also provides novel insights into SOFR term rate behavior (and implied volatilities) within their accrual periods, and a model mechanism by which interest rate mean reversion arises from monetary policy.
John Maynard Keynes asserted that the central bank sways the long-term interest rate through the influence of its policy rate on the short-term interest rate. Recent empirical research shows that ...Keynes's conjecture holds for long-term Treasury yields in the United States. This article investigates whether Keynes's claim also holds for the monthly changes in U.S.-dollar-denominated long-term swap yields by econometrically modeling its dynamics using an autoregressive distributed lag (ARDL) approach. The econometric modeling reveals that there is a statistically significant effect of the monthly changes in the Treasury bill rate on the monthly changes in swap yields of different maturity tenors after controlling for a host of macroeconomic and financial control variables. The findings from the econometric models that are estimated render a perspicacious Keynesian perspective on key policy questions and contemporary debates in macroeconomics and finance.
This paper aims to propose referable asset allocation criteria for a defined-contribution (DC) pension plan under stochastic interest rates and the minimum guarantee of inflation protection on ...annuities. Motivated by the work of Litterman and Scheinkman (1991), which verifies that interest rate risks could be properly modeled with multiple factors, our proposed model extends the Jarrow and Yildirim (JY, 2003) model to a multi-factor framework, and simultaneously incorporates a stock asset to develop what is called the extended JY model in this study. The extended JY model can specify an economic environment with the consideration of risks arising from nominal and real interest rates, the CPI index (inflation rates), and the value of a stock portfolio, which facilitates to complete the closed-form solutions for the stochastic dynamic programming problem of a DC pension plan. The subsequent numerical experiment examines the allocative behaviors in an inflationary economy. In addition, the term effects among interest rates show to have a substantial impact on allocative decisions, and thus can be properly exploited to improve the final wealth of the pension fund.
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