http://repub.eur.nl/res/concept/jel-E43/ Recent publications classified by JEL Code E43 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/39191/ 2013-03-07T00:00:00Z Raviv, E. http://repub.eur.nl/res/pub/38225/ 2012-12-31T00:00:00Z Jaskowski, M. McAleer, M.J. http://repub.eur.nl/res/pub/23464/ 2011-06-01T00:00:00Z Using a large, previously unexplored data set of survey-based interest rate forecasts that covers a broad range of countries, this paper re-examines the expectations hypothesis of the term structure of interest rates. We find that survey-based interest rate forecasts outperform not only a random walk forecast, but also outperform forecasts from forward rates. When using these superior survey-based forecasts in a modified expectations hypothesis test, the expectations hypothesis is rejected for fewer countries, at lower significance levels, and has greater explanatory power than when using a traditional forward rates-based test. We furthermore document strong time-variation in the term premia, which is an important reason why the traditional expectations hypothesis test is rejected so frequently. This time-variation seems to arise from the changing attitudes towards risk among market participants and as a compensation for the change in liquidity in the term structure. Finally, we find that generalizing findings from earlier U.S. studies to other countries may lead to bias in the true economic relationships in these countries. Jongen, R. Verschoor, W.F.C. Wolff, C.C.P. http://repub.eur.nl/res/pub/23262/ 2011-04-06T00:00:00Z We extend the class of dynamic factor yield curve models for the inclusion of macro-economic factors. We benefit from recent developments in the dynamic factor literature for extracting the common factors from a large panel of macroeconomic series and for estimating the parameters in the model. We include these factors into a dynamic factor model for the yield curve, in which we model the salient structure of the yield curve by imposing smoothness restrictions on the yield factor loadings via cubic spline functions. We carry out a likelihood-based analysis in which we jointly consider a factor model for the yield curve, a factor model for the macroeconomic series, and their dynamic interactions with the latent dynamic factors. We illustrate the methodology by forecasting the U.S. term structure of interest rates. For this empirical study we use a monthly time series panel of unsmoothed Fama-Bliss zero yields for treasuries of different maturities between 1970 and 2009, which we combine with a macro panel of 110 series over the same sample period. We show that the relation between the macroeconomic factors and yield curve data has an intuitive interpretation, and that there is interdependence between the yield and macroeconomic factors. Finally, we perform an extensive out-of-sample forecasting study. Our main conclusion is that macroeconomic variables can lead to more accurate yield curve forecasts. Koopman, S.J. Wel, M. van der http://repub.eur.nl/res/pub/22151/ 2011-01-13T00:00:00Z This paper examines the long- and short-run asymmetric adjustments for nine pairs of spot and futures prices, itemized as three own pairs for three different bio-fuel ethanol types, three own pairs for three related agricultural products, namely corn, soybeans and sugar, and three cross pairs that included hybrids of the spot price of each of the agricultural products and an ethanol futures price. Most of the spreads’ asymmetric adjustments generally happen during narrowing. The three ethanol pairs that contain the eCBOT futures with each of Chicago spot, New York Harbor spot and Western European (Rotterdam) spot show different long-run adjustments, arbitrage profitable opportunities and price risk hedging capabilities. The asymmetric spread adjustments for the three grains are also different, with corn spread showing the strongest long-run widening adjustment, and sugar showing the weakest narrowing adjustment. Among others, the empirical analysis indicates the importance of potentially hedging the spot prices of agricultural commodities with ethanol futures contracts, which sends an important message that the ethanol futures market is capable of hedging price risk in agricultural commodity markets. The short-run asymmetric adjustments for individual prices in the nine pairs (with exception of the corn own pair underscore the importance of futures prices in the price discovery and hedging potential, particularly for ethanol futures. Chang, C.L. Chen, L.H. Hammoudeh, S.M. McAleer, M.J. http://repub.eur.nl/res/pub/13886/ 2008-04-18T00:00:00Z We derive a model in which a standard international capital asset pricing (ICAPM) model is nested within an ICAPM model with market imperfections. In the latter model an idiosyncratic stochastic factor affects the return of risky assets (over a risk-free rate) on top of the systematic component that is common to all countries (and that is interacted with a timevarying idiosyncratic “beta”). We introduce asymptotic convergence from the full ICAPM model with imperfections to the standard model by multiplying the idiosyncratic factor by convergence operators. The model is then estimated using the weekly 10 year government bond spreads of Belgium, France, Italy, and the Netherlands versus Germany over the period 1991-2006. We find that the idiosyncratic components have converged towards zero for all countries after the introduction of the euro implying that the efficiency of the euro area government bond markets under consideration has increased. Full convergence has not yet occurred however. Pozzi, L.C.G. http://repub.eur.nl/res/pub/10891/ 2007-12-21T00:00:00Z We measure the economic value of information derived from macroeconomic variables and from technical trading rules for emerging markets currency investments. Our analysis is based on a sample of 21 emerging markets with a floating exchange rate regime over the period 1997-2007 and explicitly accounts for trading restrictions on foreign capital movements by using non-deliverable forward data. We document that both types of information can be exploited to implement profitable trading strategies. In line with evidence from surveys of foreign exchange professionals concerning the use of fundamental and technical analysis, we find that combining the two types of information improves the risk-adjusted performance of the investment strategies. Zwart, G.J. de Markwat, T.D. Swinkels, L.A.P. Dijk, D.J.C. van http://repub.eur.nl/res/pub/9148/ 2007-03-03T00:00:00Z We forecast the term structure of U.S. Treasury zero-coupon bond yields by analyzing a range of models that have been used in the literature. We assess the relevance of parameter uncertainty by examining the added value of using Bayesian inference compared to frequentist estimation techniques, and model uncertainty by combining forecasts from individual models. Following current literature we also investigate the benefits of incorporating macroeconomic information in yield curve models. Our results show that adding macroeconomic factors is very beneficial for improving the out-of-sample forecasting performance of individual models. Despite this, the predictive accuracy of models varies over time considerably, irrespective of using the Bayesian or frequentist approach. We show that mitigating model uncertainty by combining forecasts leads to substantial gains in forecasting performance, especially when applying Bayesian model averaging. Pooter, M.D. de Ravazzolo, F. Dijk, D.J.C. van http://repub.eur.nl/res/pub/8993/ 2007-02-19T00:00:00Z According to uncovered interest rate Parity (UIP), the expected relative change in an exchange rate is equal to the difference between interest rates between the two currencies. Empirically, UIP is frequently rejected. In this paper, we examine whether exchange rates have at least any tendency to move in the direction predicted by UIP and whether exchange rates tend to move more in line with UIP in periods with large interest rate differentials. Huisman, R. Mahieu, R.J. Mulder, A. http://repub.eur.nl/res/pub/8288/ 2007-01-15T00:00:00Z In this paper, we examine in which periods uncovered interest rate parity was likely to hold. Empirical research has shown mixed evidence on UIP. The main finding is that it doesn’t hold, although some researchers were not able to reject UIP in periods with large interest differentials or high volatility. In this paper, we introduce a switching regime framework in which we assume that the exchange rate can switch between a UIP regime and a random walk regime. Our empirical results provide evidence that exchange rate movements were consistent with UIP over some periods, but not all. Consistent with the existing literature we also show that in periods with large interest differentials or increased exchange rate volatility, the exchange rate is more likely to follow UIP. Huisman, R. Mahieu, R.J. http://repub.eur.nl/res/pub/8042/ 2006-10-30T00:00:00Z In this paper we incorporate the term structure of interest rates in a standard inflation forecast targeting framework. We find that under flexible inflation targeting and uncertainty in the degree of persistence in the economy, allowing for active learning possibilities has effects on the optimal interest rate rule followed by the central bank. For a wide range of possible initial beliefs about the unknown parameter, the dynamically optimal rule is in general more activist, in the sense of responding aggressively to the state of the economy, than the myopic rule for small to moderate deviations of the state variable from its target. On the other hand, for large deviations, the optimal policy is less activist than the myopic and the certainty equivalence policies. Tesfaselassie, M.F. Schaling, E. Eijffinger, S.C.W. http://repub.eur.nl/res/pub/17273/ 2006-04-01T00:00:00Z We present and estimate a continuous time term structure model that incorporates observable macroeconomic variables and latent variables with a clear macroeconomic interpretation. Our model is able to accurately describe the joint dynamics for US macroeconomic variables and the yield curve. However, the observable variables do not explain the long end of the term structure. Central tendencies of these macroeconomic variables do a much better job in this respect. These unobservable factors also play an important role in the description of the interest rate policy rule. Both observable and non-observable factors determine the risk premia and hence bond excess holding returns. Dewachter, H.D.R. Lyrio, M. Maes, K. http://repub.eur.nl/res/pub/1933/ 2005-04-03T00:00:00Z Geometric optimisation algorithms are developed that efficiently find the nearest low-rank correlation matrix. We show, in numerical tests, that our methods compare favourably to the existing methods in the literature. The connection with the Lagrange multiplier method is established, along with an identification of whether a local minimum is a global minimum. An additional benefit of the geometric approach is that any weighted norm can be applied. The problem of finding the nearest low-rank correlation matrix occurs as part of the calibration of multi-factor interest rate market models to correlation. Grubišić, I. Pietersz, R. http://repub.eur.nl/res/pub/1907/ 2005-03-08T00:00:00Z Currently, there are two market models for valuation and risk management of interest rate derivatives, the LIBOR and swap market models. In this paper, we introduce arbitrage-free constant maturity swap (CMS) market models and generic market models featuring forward rates that span periods other than the classical LIBOR and swap periods. We develop generic expressions for the drift terms occurring in the stochastic differential equation driving the forward rates under a single pricing measure. The generic market model is particularly apt for pricing of Bermudan CMS swaptions, fixed-maturity Bermudan swaptions, and callable hybrid coupon swaps. Pietersz, R. Regenmortel, M. van http://repub.eur.nl/res/pub/6657/ 2004-03-12T00:00:00Z Banks provide risky loans to firms which have superior information regarding the quality of their projects. Due to asymmetric information the banks face the risk of adverse selection. Credit Value-at-Risk (CVaR) regulation counters the problem of low quality, i.e. high risk, loans and therefore reduces the risk of the bank loan portfolio. However, CVaR regulation distorts the operation of credit markets. We show that a binding CVaR constraint introduces credit rationing and lowers social welfare. CVaR regulation also affects the operation of monetary policy. Slijkerman, J.F. Smant, D.J.C. Vries, C.G. de http://repub.eur.nl/res/pub/324/ 2003-04-29T00:00:00Z This paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long-run expectations. The model extends the approach pioneered by Kozicki and Tinsley (2001) by modeling consistently long-run inflation expectations simultaneously with the term structure. This model thus avoids the standard pre-filtering of long-run expectations, as proposed by Kozicki and Tinsley (2001). Application to the U.S. economy shows the importance of long-run inflation expectations in the modelling of long-term bonds. The paper also provides a macroeconomic interpretation for the factors found in a latent factor model of the term structure. More specifically, we find that the standard "level" factor is highly correlated to long-run inflation expectations, the "slope" factor captures temporary business cycle conditions, while the "curvature" factor represents a clear independent monetary policy factor. Dewachter, H.D.R. Lyrio, M. http://repub.eur.nl/res/pub/6948/ 2000-07-05T00:00:00Z Most of the available monthly interest data series consist of monthly averages of daily observations. It is well- known that this averaging introduces spurious autocorrelation effects in the first differences of the series. It is exactly this differenced series we are interested in when estimating interest rate risk exposures e.g. This paper presents a method to filter this autocorrelation component from the averaged series. In addition we investigate the potential effect of averaging on duration analysis, viz. when estimating the relationship between interest rates and financial market variables like equity or bond prices. In contrast to interest rates the latter price series are readily available in ultimo month form. We find that combining monthly returns on market variables with changes in averaged interest rates leads to serious biases in estimated correlations (R2s), regression coefficients (durations) and their significance (t-statistics). Our theoretical findings are confirmed by an empirical investigation of US interest rates and their relationship with US equities (S&P 500 Index). Hallerbach, W.G.P.M.