The paper estimates conditional pricing models for 11 international government bonds and shows that, while local instruments capture the change in the bonds' risks, global instruments model the variation in the factor risk premia. Altogether the changes in the factor risk premium capture 78.25% of the bonds' predictability, while the dynamics in the betas account for less than 1%. One cannot conclude however that the conditional models are well-specified as parameter instability and relatively large mean squared errors were uncovered. These results extend for the first time some of the evidence from the equity market of Ferson and Harvey (1993), Harvey (1995) and Ghysels (1998) to the bond market.
...In mathematical terms, the bond conditional risk premium reads as follow... risk and international proxies for (4) inflation, (5) the term structure of interest rates and (6) ...
In the spring of 2004, there was widespread expectation in financial markets that the Federal Reserve would shortly begin the process of raising its federal funds rate target back toward a more normal level. Much of this concern was based on the sizable increases in long-term rates that occurred when the Federal Reserve tightened monetary policy in 1994-1995 and 1999-2000. In contrast to the conventional wisdom, however, longer-term rates actually declined as the funds rate target rose. This article provides a framework for understanding the relationship between monetary policy and the yield curve that can be used to analyze the behavior of long-term rates during periods of monetary policy tightening. The authors use the framework to examine two recent episodes of policy tightening, in ...
... could lead to a sharp rise in long-term interest rates that might roil financial markets or slow th...This chart shows the maturity structure of the yield curve from one to ten years at select... and a term premium to compensate for risk. What this theory implies about nearterm versus di... to suppress excess demand and inflationary pressures. Thus, short-term rates will be heavily ... expect no change in future policy, term premia may cause long-term rates to be higher than short-...
Consumer price inflation remains moderate even though the cyclical upturn in the Norwegian economy is in a mature phase. Underlying inflation has been fairly stable and ranged between 1% and 1 1/2% over a longer period. Growth in the Norwegian economy has been strong. High income growth and high income expectations, combined with low interest rates, have led to brisk growth in demand in the business, household and public sectors. So far, there are few signs of a slowdown in the Norwegian economy. There are prospects that the strong expansion will be sustained for a longer period than previously envisaged. The growth outlook for the world economy remains favorable. Monetary policy cannot fine-tune developments in the economy, but must counter the effects of large disturbances to the econ...
... inflation close to the target in the medium term. The horizon will depend on disturbances to which ...The outlook and the balance of risks suggest that it would be appropriate to continue r...Under certain assumptions about risk premia, forward rates may reflect market expectations abo... things on assumptions about production structure and competitive conditions in the economy. See, fo...
...The attempt to establish risk-based capital standards has been a failure, as man... a failed attempt at regulation should be termed deregulation. In any case, the SEC commissioners a... instead of serving the public interest as they are mandated to do, end up acting systemat... more likely to advocate targeting an inflation rate or the growth of nominal GDP (Barro 1990: 21-... monetary policy could bring down interest rates (Davis 1971: 121-22). At this 1931 meeting, we per...Risk-premia all but disappeared. Not regulatory laxity, but mo...([1956] 1978) Capital and Its Structure. Kansis City: Sheed Andrews and McMeel. . Leijonhu...
Ocampo et al. point out that capital market liberalization may exacerbate the market inefficiencies, increasing volatility and reducing the efficiency with which resources are allocated. Häusler et al. think that a strong banking system is likely to play a key role in facilitating the development of local securities and derivatives. Smith and Walter focus on the role of financial markets and their respective institutions and the fault-lines in the system that have come to light.
...provide an analysis of both the risks associated with capital market liberalization and ... that the market discipline imposed by short-term capital flows is not necessarily a positive force ... risks, especially those related to exchange rates and interest rates. The development of the equity ...The large fluctuations in risk premia for emerging markets tend to correlate with spread... local bond markets, especially in high-inflation emerging markets. Inflationlinked bonds provide ri... development of ideas about how that structure should be governed, and examine the two key agents...
This Economic Commentary explains a relatively new method of uncovering inflation expectations, real interest rates, and an inflation-risk premium. It provides estimates of expected inflation from one month to 30 years, an estimate of the inflation-risk premium, and a measure of real interest rates, particularly a short (one-month) rate, which is not readily available from the TIPS market. Calculations using the method suggest that longer-term inflation expectations remain near historic lows. Furthermore, the inflation-risk premium is also low, which in the model means that inflation is not expected to deviate far from expectations.
... securities conflate expectations with risk premia. Uncovering a purer measure is possible, but it ta... date (say June 2, 1995) lists the "term structure" of rates at one month, three months, one year, an...
... investors about potential conflicts of interest that could affect the credit rating. In addition, ... ``[b]ecause of these non-credit payment risks, there is substantially greater uncertainty relati... principal and interest obligations, a structured note whose principal and interest is tied, for exa... Asset Complexity: A Theory of Ratings Inflation, working paper, (Feb. 2009), at http://pages.stern... are purchased on the basis of interest rates and credit ratings. See. Section III.A.1 of the In... non- participatory preferred stock as that term is used under 17 CFR 230.902(a)(1). \54\ Form N-2 ...These price premia may affect issuance behavior. For example, registr...
Powerful real shocks combined to buffet the economy in 2007 and 2008. A combination of a fall in housing wealth from declining house prices and a fall in real income from increasing energy and food prices made individuals worse off. Based on the view that dysfunction in credit markets intensified the recession, monetary policy has focused on intervention into individual credit markets deemed impaired. The spirit of this article is to use empirical generalizations deduced from historical experience and constrained by theory so that they are robust for predicting the consequences of monetary policy. Relevant to current experience is the rapidity with which the economy recovered in the Depression when monetary contraction did not produce a real short-term interest rate in excess of the nat...
..., in late 1973 and early 1974, an inflation shock because of an oil-price rise and the end of ..."High" interest rates fail to restrain speculative excess while "low" in... bankers driven by greed took excessive risks and, in reaction, became excessively risk-averse (... interventions apart from rearranging risk premia among different markets. In December 2008, the rel... funds rate but also the entire term structure of real interest rates. The central bank requires ...
... result in a new optimal debt maturity structure. Using a stochastic simulation macro-econometric m... to stabilize the budget balance as interest rates tend to decline when the economy is weak. . ...The policy implication is that a risk-averse government should issue a "prudent" (i.e., ... to other shocks (e.g., interest rate, inflation, and supply shocks). . We assume throughout this s... of interest rates with constant term premia. For example, the expected real yield on a "m-peri...
Ongoing efforts to find the best method for predicting recessions leave many questions unresolved. One approach with an excellent track record is the term spread model of Estrella and Hardouvelis (1991). When the yield on a three-month Treasury bill rises higher than the yield on a ten-year Treasury note, the model forecasts that a recession will begin twelve months in the future. This article investigates whether changes in the term premium tend to distort the term spread's recession signals. The article begins by decomposing the term spread into an expectations component and a term premium component, based on the Kim and Wright (2005) term premium estimates. Next, the article constructs recession forecasting models based on these components, following the approach of Estrella and Hard...
... hypothesis posits that long-term interest rates are determined by expected future short-term...: Longer term Treasury securities are riskier and require a premium to compensate for this extraa risk. These term premia vary over time as interest rate risk and investors...In turn, each component includes both inflation-related and real factors:. (2) expectations compon... the expectations component using a term structure model that requires all bonds to be priced fairly ...
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