One of the most striking evidences of the failure in financial regulation is represented by the London Interbank Offered Rate (LIBOR). Since May 2008, a huge scandal focusing on a possibility of criminal wrongdoing by a number of the most trusted international banks revealed manipulation of the benchmark interest rate known as the LIBOR. This scandal became as matter of fact on June 2012 when Barclays agreed to pay fines of $360 million and $144.5 for having rigged the LIBOR. This paper provides the crucial evidence of LIBOR manipulation including a communication evidence between interest rate derivative traders and LIBOR submitters described in the CFTC and FSA documents. Also, we provide statistical evidence of LIBOR manipulation including LIBOR quotes and cross-sectional p-value correlation for banks' quote on the LIBOR submission. Furthermore, the paper applies Probability of Informed Trading or "PIN" with the LIBOR manipulation cases recorded in the regulatory reports. The objective of this empirical exercise is to examine the effectiveness of the PIN model from Easley et al. (1996) in actually detecting informed behavior around a LIBOR manipulation event. For this study, we use a data set of Eurodollar futures market as the pricing mechanism of the futures which is based on the LIBOR. to clearly understand why the Eurodollar futures is used as a data set to study the PIN around the LIBOR manipulation, this research provides the number of communication requested on LIBOR manipulation related to a number of currencies. From this evidence, it can be seen that the second most popular was the 3M-LIBOR which is the benched mark for the Eurodollar futures market. Additionally, we then compute the PIN around the maturity date as a normal event in the futures contract and investigate the variation of PIN around these events. Therefore, focused on a short period, the variation of PIN around LIBOR manipulation indicates that the PIN is a good early warning signal. However, the general long-run variation of the PIN was not statistically significant relative to both LIBOR manipulation and the maturity event.
伦敦银行同业拆借利率(LIBOR)是金融监管失败最显著的证据之一。自2008年5月以来，一场巨大的丑闻曝光了一些最受信任的国际银行操纵基准利率伦敦银行间拆放款利率(LIBOR)的可能性。2012年6月，巴克莱银行同意支付3.6亿美元和1445美元的罚款，这一丑闻成为事实。本文提供了LIBOR操纵的关键证据，包括CFTC和FSA文件中描述的利率衍生品交易商和LIBOR提交者之间的沟通证据。此外，我们还提供了LIBOR操纵的统计证据，包括LIBOR报价和银行在LIBOR提交时报价的横截面p值相关性。此外，本文将知情交易概率(Probability of Informed Trading，简称“PIN”)应用于监管报告中记录的LIBOR操纵案例。本实证练习的目的是检验Easley等人(1996)的PIN模型在实际检测LIBOR操纵事件周围的知情行为方面的有效性。在本研究中，我们使用欧洲美元期货市场的数据集作为基于LIBOR的期货定价机制。为了清楚地理解为什么欧洲美元期货被用作一个数据集来研究围绕LIBOR操纵的PIN，本研究提供了与一些货币相关的LIBOR操纵所需的通信数量。从这一证据可以看出，第二受欢迎的是300米伦敦银行同业拆借利率，这是欧洲美元期货市场的基准。此外，我们然后计算到期日附近的PIN作为期货合约中的正常事件，并研究这些事件周围的PIN变化。因此，从短期来看，围绕LIBOR操纵的PIN变化表明，PIN是一个很好的预警信号。然而，相对于LIBOR操纵和到期事件，PIN的一般长期变化在统计上并不显著。
{"title":"LIBOR Manipulation and Detecting Informed Trading Evidence from the Interest Rate Derivatives Market","authors":"P. Phuensane, Julian M. Williams","doi":"10.2139/ssrn.2864202","DOIUrl":"https://doi.org/10.2139/ssrn.2864202","url":null,"abstract":"One of the most striking evidences of the failure in financial regulation is represented by the London Interbank Offered Rate (LIBOR). Since May 2008, a huge scandal focusing on a possibility of criminal wrongdoing by a number of the most trusted international banks revealed manipulation of the benchmark interest rate known as the LIBOR. This scandal became as matter of fact on June 2012 when Barclays agreed to pay fines of $360 million and $144.5 for having rigged the LIBOR. \u0000This paper provides the crucial evidence of LIBOR manipulation including a communication evidence between interest rate derivative traders and LIBOR submitters described in the CFTC and FSA documents. Also, we provide statistical evidence of LIBOR manipulation including LIBOR quotes and cross-sectional p-value correlation for banks' quote on the LIBOR submission. Furthermore, the paper applies Probability of Informed Trading or \"PIN\" with the LIBOR manipulation cases recorded in the regulatory reports. The objective of this empirical exercise is to examine the effectiveness of the PIN model from Easley et al. (1996) in actually detecting informed behavior around a LIBOR manipulation event. For this study, we use a data set of Eurodollar futures market as the pricing mechanism of the futures which is based on the LIBOR. to clearly understand why the Eurodollar futures is used as a data set to study the PIN around the LIBOR manipulation, this research provides the number of communication requested on LIBOR manipulation related to a number of currencies. From this evidence, it can be seen that the second most popular was the 3M-LIBOR which is the benched mark for the Eurodollar futures market. Additionally, we then compute the PIN around the maturity date as a normal event in the futures contract and investigate the variation of PIN around these events. Therefore, focused on a short period, the variation of PIN around LIBOR manipulation indicates that the PIN is a good early warning signal. However, the general long-run variation of the PIN was not statistically significant relative to both LIBOR manipulation and the maturity event.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-01-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132177558","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Bruno Feunou, Jean-Sébastien Fontaine, A. Le, C. Lundblad
We introduce a new framework that facilitates term structure modeling with both positive interest rates and flexible time series dynamics but that is also tractable, meaning amenable to quick and robust estimation. Using both simulations and U.S. historical data, we compare our approach with benchmark Gaussian and stochastic volatility models as well as a shadow rate model that enforces positive interest rates. Our approach, which remains arbitrarily close to arbitrage free, offers a more accurate characterization of bond Sharpe ratios because of a better fit of the volatility dynamics and a more efficient estimation of the return dynamics. Further, the shadow rate and stochastic volatility models exhibit important restrictions that are largely absent in our approach. This paper was accepted by Agostino Capponi, finance.
{"title":"Tractable Term Structure Models","authors":"Bruno Feunou, Jean-Sébastien Fontaine, A. Le, C. Lundblad","doi":"10.2139/ssrn.2693568","DOIUrl":"https://doi.org/10.2139/ssrn.2693568","url":null,"abstract":"We introduce a new framework that facilitates term structure modeling with both positive interest rates and flexible time series dynamics but that is also tractable, meaning amenable to quick and robust estimation. Using both simulations and U.S. historical data, we compare our approach with benchmark Gaussian and stochastic volatility models as well as a shadow rate model that enforces positive interest rates. Our approach, which remains arbitrarily close to arbitrage free, offers a more accurate characterization of bond Sharpe ratios because of a better fit of the volatility dynamics and a more efficient estimation of the return dynamics. Further, the shadow rate and stochastic volatility models exhibit important restrictions that are largely absent in our approach. This paper was accepted by Agostino Capponi, finance.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"15 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-10-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133388873","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We derive a closed form expression for the convexity adjustment to be applied to a Libor coupon with non natural payment time. The model is a two dimensional lognormal model for the Libor rate and a forward rate naturally associated to this rate and the payment time of the coupon. In particular we recover the in arrears fixing adjustment as a special case.
{"title":"Libor Timing Adjustments","authors":"P. Caspers","doi":"10.2139/ssrn.2170721","DOIUrl":"https://doi.org/10.2139/ssrn.2170721","url":null,"abstract":"We derive a closed form expression for the convexity adjustment to be applied to a Libor coupon with non natural payment time. The model is a two dimensional lognormal model for the Libor rate and a forward rate naturally associated to this rate and the payment time of the coupon. In particular we recover the in arrears fixing adjustment as a special case.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-08-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115763714","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, I consider forecasting from a reduced-form VAR under the zero lower bound (ZLB) for the short-term nominal interest rate. I develop a method that a) computes the exact moments for the first n + 1 periods when n previous periods are tracked and b) approximates moments for the periods beyond n + 1 period using techniques for truncated normal distributions and approximations a la Kim (1994). I show that the algorithm produces satisfactory results for VAR systems with moderate to high persistence even when only one previous period is tracked. For very persistent VAR systems, however, tracking more periods is needed in order to obtain reliable approximations. I also show that the method is suitable for affine term-structure modeling, where the underlying state vector includes the short-term interest rate as in Taylor rules with inertia.
在本文中，我考虑在零下限(ZLB)下从简化形式VAR预测短期名义利率。我开发了一种方法，a)在跟踪前n个周期时计算前n + 1个周期的精确矩，b)使用截断正态分布和近似技术近似超过n + 1个周期的矩(la Kim, 1994)。我表明，该算法产生了令人满意的结果，VAR系统具有中等到高的持久性，即使只有一个前期跟踪。然而，对于非常持久的VAR系统，为了获得可靠的近似值，需要跟踪更多的周期。我还表明，该方法适用于仿射期限结构建模，其中潜在的状态向量包括短期利率，如泰勒规则中的惯性。
{"title":"Forecasts from Reduced-Form Models Under the Zero-Lower-Bound Constraint","authors":"Mehmet Pasaogullari","doi":"10.26509/WP-201512","DOIUrl":"https://doi.org/10.26509/WP-201512","url":null,"abstract":"In this paper, I consider forecasting from a reduced-form VAR under the zero lower bound (ZLB) for the short-term nominal interest rate. I develop a method that a) computes the exact moments for the first n + 1 periods when n previous periods are tracked and b) approximates moments for the periods beyond n + 1 period using techniques for truncated normal distributions and approximations a la Kim (1994). I show that the algorithm produces satisfactory results for VAR systems with moderate to high persistence even when only one previous period is tracked. For very persistent VAR systems, however, tracking more periods is needed in order to obtain reliable approximations. I also show that the method is suitable for affine term-structure modeling, where the underlying state vector includes the short-term interest rate as in Taylor rules with inertia.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"43 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-07-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133493056","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we propose a strategy to extract the information on the market participants’ expectation of the future short rate from the cross-sectional zero coupon bond prices. In line with the current market practice of building different yield curves for different tenors, we construct multiple one-factor short rate processes to pin down the salient features of the yield curve at different tenors. We represent this information in the form of the Cox–Ingersoll–Ross model implied parameters, and show that this information can be used to forecast the future short rate. This approach of representing the information on the market participants’ consensus in the form of implied model parameters and using these implied parameters for forecasting purposes resembles the approach of representing the market expectation of the underlying asset volatility reflected by stock option prices in the form of implied volatility, and using it to forecast the realized volatility. We illustrate the implementation of this method using historical US STRIPS prices and effective Federal Funds rate.
{"title":"Short Rate Forecasting Based on the Inference from the CIR Model for Multiple Yield Curve Dynamics","authors":"L. Hin, N. Dokuchaev","doi":"10.2139/ssrn.2539556","DOIUrl":"https://doi.org/10.2139/ssrn.2539556","url":null,"abstract":"In this paper, we propose a strategy to extract the information on the market participants’ expectation of the future short rate from the cross-sectional zero coupon bond prices. In line with the current market practice of building different yield curves for different tenors, we construct multiple one-factor short rate processes to pin down the salient features of the yield curve at different tenors. We represent this information in the form of the Cox–Ingersoll–Ross model implied parameters, and show that this information can be used to forecast the future short rate. This approach of representing the information on the market participants’ consensus in the form of implied model parameters and using these implied parameters for forecasting purposes resembles the approach of representing the market expectation of the underlying asset volatility reflected by stock option prices in the form of implied volatility, and using it to forecast the realized volatility. We illustrate the implementation of this method using historical US STRIPS prices and effective Federal Funds rate.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"247 ","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-06-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"113983389","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Most existing macro-finance term structure models (MTSMs) appear incompatible with regression evidence of unspanned macro risk. This “spanning puzzle” appears to invalidate those models in favor of new unspanned MTSMs. However, our empirical analysis supports the previous spanned models. Using simulations to investigate the spanning implications of MTSMs, we show that a canonical spanned model is consistent with the regression evidence; thus, we resolve the spanning puzzle. In addition, direct likelihood-ratio tests find that the knife-edge restrictions of unspanned models are rejected with high statistical significance, though these restrictions have only small effects on cross-sectional fit and estimated term premia.
{"title":"Resolving the Spanning Puzzle in Macro-Finance Term Structure Models","authors":"M. Bauer, Glenn D. Rudebusch","doi":"10.2139/ssrn.2518037","DOIUrl":"https://doi.org/10.2139/ssrn.2518037","url":null,"abstract":"Most existing macro-finance term structure models (MTSMs) appear incompatible with regression evidence of unspanned macro risk. This “spanning puzzle” appears to invalidate those models in favor of new unspanned MTSMs. However, our empirical analysis supports the previous spanned models. Using simulations to investigate the spanning implications of MTSMs, we show that a canonical spanned model is consistent with the regression evidence; thus, we resolve the spanning puzzle. In addition, direct likelihood-ratio tests find that the knife-edge restrictions of unspanned models are rejected with high statistical significance, though these restrictions have only small effects on cross-sectional fit and estimated term premia.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2015-01-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131125000","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2013-11-01DOI: 10.1920/WP.CEM.2013.5213
Carlo Altavilla, R. Giacomini, Giuseppe Ragusa
The dynamic behavior of the term structure of interest rates is difficult to replicate with models, and even models with a proven track record of empirical performance have underperformed since the early 2000s. On the other hand, survey expectations are accurate predictors of yields, but only for very short maturities. We argue that this is partly due to the ability of survey participants to incorporate information about the current state of the economy as well as forward-looking information such as that contained in monetary policy announcements. We show how the informational advantage of survey expectations about short yields can be exploited to improve the accuracy of yield curve forecasts given by a base model. We do so by employing a flexible projection method that anchors the model forecasts to the survey expectations in segments of the yield curve where the informational advantage exists and transmits the superior forecasting ability to all remaining yields. The method implicitly incorporates into yield curve forecasts any information that survey participants have access to, without the need to explicitly model it. We document that anchoring delivers large and significant gains in forecast accuracy for the whole yield curve, with improvements of up to 52% over the years 2000-2012 relative to the class of models that are widely adopted by financial and policy institutions for forecasting the term structure of interest rates.
{"title":"Anchoring the Yield Curve Using Survey Expectations","authors":"Carlo Altavilla, R. Giacomini, Giuseppe Ragusa","doi":"10.1920/WP.CEM.2013.5213","DOIUrl":"https://doi.org/10.1920/WP.CEM.2013.5213","url":null,"abstract":"The dynamic behavior of the term structure of interest rates is difficult to replicate with models, and even models with a proven track record of empirical performance have underperformed since the early 2000s. On the other hand, survey expectations are accurate predictors of yields, but only for very short maturities. We argue that this is partly due to the ability of survey participants to incorporate information about the current state of the economy as well as forward-looking information such as that contained in monetary policy announcements. We show how the informational advantage of survey expectations about short yields can be exploited to improve the accuracy of yield curve forecasts given by a base model. We do so by employing a flexible projection method that anchors the model forecasts to the survey expectations in segments of the yield curve where the informational advantage exists and transmits the superior forecasting ability to all remaining yields. The method implicitly incorporates into yield curve forecasts any information that survey participants have access to, without the need to explicitly model it. We document that anchoring delivers large and significant gains in forecast accuracy for the whole yield curve, with improvements of up to 52% over the years 2000-2012 relative to the class of models that are widely adopted by financial and policy institutions for forecasting the term structure of interest rates.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"22 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"116900177","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
After 2010 and the Greek economic crisis, a major concern of the Eurozone was what will happen with the country’s membership. There were several opinions about what Greece should do; many economists believed that leaving the Euro could lead to the collapse of the whole union in a chain reaction, others however believed that Greece could only be saved if it left the union and tried to achieve external devaluation with its own new national currency. Greece asked for help from the IMF and tried to comply with the austerity measures in order to achieve internal devaluation and finally improve competitiveness. In this dissertation paper I examined several other union breakups in order to draw some lessons; in most cases exiting a union was encouraging for the economies leaving the unions. Furthermore, I ran regression analyses to see how the Greek bond yields, bond spreads and CDS spreads are affected by the situation and also how the borrowing costs of Greece along with the risk of investing in Greek sovereign debt titles is affected by the credit rating of Greece set by the three credit rating agencies. Moreover, after comparing the expectations of the Troika to the real data after the implementation of the Troika’s program I found out that the Troika greatly underestimated the negative impacts of its policies and that after three years of austerity policy, the Hellenic economy was not able to recover. Considering that the only other solution for Hellas, is leaving the Eurozone, I constructed a Plan B, indicating the steps that the Greek government should follow after a Hellexit.
{"title":"The Possibility of a Hellenic Exit from the Eurozone: The Plan B","authors":"Yiannis Athanasiadis","doi":"10.2139/ssrn.2910320","DOIUrl":"https://doi.org/10.2139/ssrn.2910320","url":null,"abstract":"After 2010 and the Greek economic crisis, a major concern of the Eurozone was what will happen with the country’s membership. There were several opinions about what Greece should do; many economists believed that leaving the Euro could lead to the collapse of the whole union in a chain reaction, others however believed that Greece could only be saved if it left the union and tried to achieve external devaluation with its own new national currency. Greece asked for help from the IMF and tried to comply with the austerity measures in order to achieve internal devaluation and finally improve competitiveness. In this dissertation paper I examined several other union breakups in order to draw some lessons; in most cases exiting a union was encouraging for the economies leaving the unions. Furthermore, I ran regression analyses to see how the Greek bond yields, bond spreads and CDS spreads are affected by the situation and also how the borrowing costs of Greece along with the risk of investing in Greek sovereign debt titles is affected by the credit rating of Greece set by the three credit rating agencies. Moreover, after comparing the expectations of the Troika to the real data after the implementation of the Troika’s program I found out that the Troika greatly underestimated the negative impacts of its policies and that after three years of austerity policy, the Hellenic economy was not able to recover. Considering that the only other solution for Hellas, is leaving the Eurozone, I constructed a Plan B, indicating the steps that the Greek government should follow after a Hellexit.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128972365","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
An examination of the statistical accuracy and economic value of modeling and forecasting the term structure of interest rates using forecast combinations is considered. Five alternative methods to combine point forecasts from several univariate and multivariate autoregressive specifications including dynamic factor models, equilibrium term structure models, and forward rate regression models are used. Moreover, a detailed performance evaluation based not only on statistical measures of forecast accuracy, but also on Sharpe ratios of fixed income portfolios is conducted. An empirical application based on a large panel of Brazilian interest rate future contracts with different maturities shows that combined forecasts consistently outperform individual models in several instances, specially when economic criteria are taken into account.
{"title":"Predicting the Yield Curve Using Forecast Combinations","authors":"J. Caldeira, G. V. Moura, A. P. Santos","doi":"10.2139/ssrn.2311733","DOIUrl":"https://doi.org/10.2139/ssrn.2311733","url":null,"abstract":"An examination of the statistical accuracy and economic value of modeling and forecasting the term structure of interest rates using forecast combinations is considered. Five alternative methods to combine point forecasts from several univariate and multivariate autoregressive specifications including dynamic factor models, equilibrium term structure models, and forward rate regression models are used. Moreover, a detailed performance evaluation based not only on statistical measures of forecast accuracy, but also on Sharpe ratios of fixed income portfolios is conducted. An empirical application based on a large panel of Brazilian interest rate future contracts with different maturities shows that combined forecasts consistently outperform individual models in several instances, specially when economic criteria are taken into account.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"75 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-08-11","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126683938","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the model-implied risk premiums account for up to 40% of the variability of one- and two-year excess returns. Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons.
{"title":"Information in the Yield Curve: A Macro-Finance Approach","authors":"H. Dewachter, Leonardo Iania, Marco Lyrio","doi":"10.2139/ssrn.2238367","DOIUrl":"https://doi.org/10.2139/ssrn.2238367","url":null,"abstract":"We use a macro-finance model, incorporating macroeconomic and financial factors, to study the term premium in the U.S. bond market. Estimating the model using Bayesian techniques, we find that a single factor explains most of the variation in bond risk premiums. Furthermore, the model-implied risk premiums account for up to 40% of the variability of one- and two-year excess returns. Using the model to decompose yield spreads into an expectations and a term premium component, we find that, although this decomposition does not seem important to forecast economic activity, it is crucial to forecast inflation for most forecasting horizons.","PeriodicalId":112822,"journal":{"name":"ERN: Interest Rate Forecasts (Topic)","volume":"26 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2013-03-23","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133838087","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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