Download or read book Ambiguity Nominal Bond Yields and Real Bond Yields written by Guihai Zhao and published by . This book was released on 2018 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book A Note on Alternative Measures of Real Bond Rates written by Palle Schelde Andersen and published by . This book was released on 1999 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Ambiguous Information about Interest Rates and Bond Uncertainty Premiums written by Hwagyun Kim and published by . This book was released on 2015 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper studies the impact of ambiguous information regarding future interest rates on bond prices. A simple bond-pricing model with ambiguity aversion shows that positive bond uncertainty premiums exist, and the interest rate ambiguity affects the term structure of interest rates and yield volatilities. Consistent with the theory, empirical measures of interest rate ambiguity based on the Survey of Professional Forecasters data significantly predict U.S. Treasury bond returns, explain variation in term spreads and yield volatility, and bond yields asymmetrically respond to good and bad news from the Federal Reserve. Results are robust to alternative empirical specifications and out-of-sample forecasts.

Download or read book Risk Ambiguity and Anomalies in the Fixed Income Market written by Zhan Shi and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contains five essays on the implications of risks and ambiguity for asset pricing puzzles, especially in the fixed income market. The first essay studies the effects of time-varying Knightian uncertainty (ambiguity) on equilibrium asset prices; the second and third essays focus on the term premia in the nominal and real Treasury bond markets; The last two examine the performance of structural models of credit risk in explaining the levels and changes of corporate yield spreads.In the first essay, I consider a continuous-time Lucas exchange economy in which an ambiguity-averse agent applies a discount rate that is adjusted not only for the current magnitude of ambiguity but also for the risk associated with its future fluctuations. As such, both the ambiguity level and volatility help raise asset premia and accommodate richer dynamics of asset prices. With a novel measure for the ambiguity level, I show that the estimated model is able to explain a wide range of asset markets anomalies, including the equity premium puzzle, the risk-free rate puzzle, the credit spread puzzle, and the expectations puzzle. In particular, this paper establishes both theoretical and empirical linkages of ambiguity with the unspanned predictability in the Treasury market. Furthermore, the proposed ambiguity measure is found to exhibit significant predictive power for excess returns on equities and bonds as well as for corporate yield spreads, a finding that justifies uncertainty channels highlighted in the model.The remaining four essays are based on work that is coauthored with Professor Jingzhi Huang. In the second chapter, we provide new and robust evidence on the power of macro variables for forecasting bond risk premia by using a recently developed model selection method--the supervised adaptive group "leastabsolute shrinkage and selection operator" (lasso) approach. We identify a single macro factor that can not only subsume the macro factors documented in the existing literature but also can substantially raise their forecasting power for future bond excess returns. Specifically, we find that the new macro factor, a linear combination of four group factors (including employment, housing, and price indices), can explain the variation in excess returns on bonds with maturities ranging from 2 to 5 years up to 43%. The new factor is countercyclical and furthermore picks up unspanned predictability in bond excess returns. Namely, the new macro factor contains substantial information on expected excess returns (as well as expected future short rates) but has negligible impact on the cross section of bond yields.In the third essay, we document a number of new empirical findings about the dynamic behavior and economic determinants of risk premia on real bonds. Specifically, we find that the real bond risk premium changes over time and fluctuates between positive and negative values. We also find that the real term structure itself contains a component that drives risk premia but is undetectable from cross section of bond yields. In addition, we present evidence on the link between real bond premia and macroeconomic variables. More specifically, we find that macro factors associated with real estate and consumer income and expenditure can capture a large portion of forecastable variation in excess returns on real bonds. These empirical findings have important implications for both affine term structure models and consumption-based asset pricing models of real bonds.The fourth essay provides new insights into the equity-credit market integration puzzle. Empirical evidence has documented that while variables suggested by structural credit risk models can explain only a small portion of corporate bond spread changes (Collin-Dufresne, Goldstein, and Martin 2001), these models provide quite accurate predictions of hedge ratios for corporate bond returns (Schaefer and Strebulaev 2008). These two stylized facts together are often considered to have conflicting implications for the level of integration between equity and credit markets -- given the fundamental relationship between corporate bond spread changes and returns. we provide a rational explanation of this anomaly by demonstrating that the two aforementioned seemingly conflicting findings can be reconciled with each other within the standard structural modeling framework. In particular, we show empirically that sensitivities of spread changes to leverage ratio or equity predicted by the Merton (1974) model are not rejected in time-series tests -- namely, the Merton hedge ratios for spread changes are too consistent with data. That is, the equity-credit market integration puzzle can be explained from a traditional hedging perspective.In the last essay, we empirically examine the hedging performance of structural models using data on corporate bond transaction prices over the period July 2002--December 2012 from the Trade Reporting and Compliance Engine (TRACE) database. While there is a large literature on the pricing performance of structural credit risk models, there is little empirical evidence on the empirical performance of these models on hedging corporate bonds. We find that the Merton (1974) model is not as useful as univariate regression models for the purpose of hedging corporate bond returns with equity. Further, for investment-grade bonds, hedging with Treasury bonds with a hedge ratio of unity is more effective than the Merton delta hedging with equity. However, we find that the Merton model is more useful for the purpose of hedging corporate bond spread changes, especially for high-yield bonds. Lastly, we also investigate the pricing performance of the Merton model. We find that on average the model overestimates (underestimates) prices (yield spreads) of bonds in our sample. Specifically, the model overestimates prices of corporate bonds by 1.87% on average. To sum, the evidence based on more recent data on transaction prices indicates that the Merton model still underpredicts yield spreads, especially for short-maturity or investment-grade bonds.

Download or read book The Real Explanation of Nominal Bond Stock Puzzles written by Mikhail Chernov and published by . This book was released on 2021 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We study the implications of this finding for asset prices. The uncovered dynamics of consumption implies modestly upward sloping real bond and equity curves, upward sloping nominal yield curve, and sign-switching correlation between equities and bonds consistent with the stylized facts. This is achieved without relying on the nominal channel too much. That is, as in the data, the variation of inflation in the model is under 40% as a fraction of variation in nominal yields.

Download or read book The Real Explanation of Nominal Bond stock Puzzles written by Mikhail Chernov and published by . This book was released on 2021 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We study the implications of this finding for asset prices. The uncovered dynamics of consumption implies modestly upward sloping real bond and equity curves, upward sloping nominal yield curve, and sign-switching correlation between equities and bonds consistent with the stylized facts. This is achieved without relying on the nominal channel too much. That is, as in the data, the variation of inflation in the model is under 40% as a fraction of variation in nominal yields.

Download or read book The Real Channel for Nominal Bond Stock Puzzles written by Mikhail Chernov and published by . This book was released on 2021 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We present evidence that the mix of transitory and permanent shocks to consumption is changing over time. We identify three regimes: two highly persistent regimes where either permanent or transitory shocks are relatively more dominant, and a disaster regime that is largely transitory. We study implications of this finding for asset prices. The transition from the second to the first regime in the mid-1990s makes the correlation between equities and bonds switch sign from positive to negative as in the data. The real bond and equity yield curves are approximately flat. The nominal bond curve is upward sloping. These results are achieved without relying on the nominal channel too much. That is, as in the data, the variation of inflation in the model is under 40% as a fraction of variation in nominal yields.

Download or read book Pricing of Bonds and Equity when the Zero Lower Bound is Relevant written by Heinrich Kick and published by . This book was released on 2017 with total page 39 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the joint dynamics of nominal bond yields, real bond yields and dividend yields from the 80s up to the aftermath of the financial crisis by mapping them on a set of macro factors. It builds on an existing discrete time affine Gaussian model of the term structure model of nominal bonds, real bonds and equity and extends it by three important innovations. Firstly, allowing for structural shifts in inflation expectations. Secondly, accounting for the relevance of the zero lower bound in the period after 2008 by modelling a so-called shadow rate and deriving asset prices by explicitly considering the zero lower bound. Finally, calculating the standard errors to correctly capture the multi-step nature of the estimation process, which results in substantially larger standard errors than previously reported for the model. We achieve statistically significant risk premia by imposing restrictions on the matrix of risk premia. Taken together, these modifications allow to better model asset prices also during the financial crisis and the ensuing economic environment of sluggish growth, low inflation rates, interest rates close to zero and quantitative easing.

Download or read book Expectation driven Term Structure of Equity and Bond Yields written by Ming Zeng and published by . This book was released on 2022 with total page 18 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent findings on the term structure of equity and bond yields pose serious challenges to existing models of equilibrium asset pricing. This paper presents a new equilibrium model of subjective expectations to explain the joint historical dynamics of equity and bond yields (and their yield spreads). The movements of equity and bond yields are driven mainly by subjective expectations of dividend and gross domestic product (GDP) growth. Yields on short-term dividend claims are more volatile because the expected short-term dividend growth meanreverts to its less volatile long-run counterpart. The procyclical slope of equity yields is due to the countercyclical slope of dividend growth expectations. The correlation between equity returns/yields and nominal bond returns/yields switched from positive to negative after the late 1990s, owing mainly to a stronger correlation between expectations of real GDP growth and real dividend growth and only partially to procyclical inflation. Dividend strip returns are predictable, and the predictive power decreases with maturity as a result of predictable forecast errors and revisions. The model is also consistent with the data in generating persistent and volatile price-dividend ratios and excess return volatility.

Download or read book Determinants of Emerging Market Sovereign Bond Spreads written by Iva Petrova and published by International Monetary Fund. This book was released on 2010-12-01 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyses the determimants of emerging market sovereign bond spreads by examining the short and long-run effects of fundamental (macroeconomic) and temporary (financial market) factors on these spreads. During the current global financial and economic crisis, sovereign bond spreads widened dramatically for both developed and emerging market economies. This deterioration has widely been attributed to rapidly growing public debts and balance sheet risks. Our results indicate that in the long run, fundamentals are significant determinants of emerging market sovereign bond spreads, while in the short run, financial volatility is a more important determinant of sperads than fundamentals indicators.

Download or read book Estimating and Interpreting Forward Interest Rates written by Mr.Lars E. O. Svensson and published by International Monetary Fund. This book was released on 1994-09-01 with total page 76 pages. Available in PDF, EPUB and Kindle. Book excerpt: The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden 1992-1994 as an example. The forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates. They separate market expectations for the short-, medium-, and long-term more easily than the standard yield curve. Forward rates are estimated with an extended and more flexible version of Nelson and Siegel’s functional form.

Download or read book Interest Rate Models Theory and Practice written by Damiano Brigo and published by Springer Science & Business Media. This book was released on 2007-09-26 with total page 1016 pages. Available in PDF, EPUB and Kindle. Book excerpt: The 2nd edition of this successful book has several new features. The calibration discussion of the basic LIBOR market model has been enriched considerably, with an analysis of the impact of the swaptions interpolation technique and of the exogenous instantaneous correlation on the calibration outputs. A discussion of historical estimation of the instantaneous correlation matrix and of rank reduction has been added, and a LIBOR-model consistent swaption-volatility interpolation technique has been introduced. The old sections devoted to the smile issue in the LIBOR market model have been enlarged into a new chapter. New sections on local-volatility dynamics, and on stochastic volatility models have been added, with a thorough treatment of the recently developed uncertain-volatility approach. Examples of calibrations to real market data are now considered. The fast-growing interest for hybrid products has led to a new chapter. A special focus here is devoted to the pricing of inflation-linked derivatives. The three final new chapters of this second edition are devoted to credit. Since Credit Derivatives are increasingly fundamental, and since in the reduced-form modeling framework much of the technique involved is analogous to interest-rate modeling, Credit Derivatives -- mostly Credit Default Swaps (CDS), CDS Options and Constant Maturity CDS - are discussed, building on the basic short rate-models and market models introduced earlier for the default-free market. Counterparty risk in interest rate payoff valuation is also considered, motivated by the recent Basel II framework developments.

Download or read book Handbook of the Economics of Finance written by George M. Constantinides and published by Newnes. This book was released on 2013-02-08 with total page 873 pages. Available in PDF, EPUB and Kindle. Book excerpt: The 12 articles in this second of two parts condense recent advances on investment vehicles, performance measurement and evaluation, and risk management into a coherent springboard for future research. Written by world leaders in asset pricing research, they present scholarship about the 2008 financial crisis in contexts that highlight both continuity and divergence in research. For those who seek authoritative perspectives and important details, this volume shows how the boundaries of asset pricing have expanded and at the same time have grown sharper and more inclusive. Offers analyses by top scholars of recent asset pricing scholarship Explains how the 2008 financial crises affected theoretical and empirical research Covers core and newly developing fields

Download or read book Handbook of the Economics of Finance SET Volumes 2A 2B written by George M. Constantinides and published by Newnes. This book was released on 2013-01-21 with total page 1732 pages. Available in PDF, EPUB and Kindle. Book excerpt: This two-volume set of 23 articles authoritatively describes recent scholarship in corporate finance and asset pricing. Volume 1 concentrates on corporate finance, encompassing topics such as financial innovation and securitization, dynamic security design, and family firms. Volume 2 focuses on asset pricing with articles on market liquidity, credit derivatives, and asset pricing theory, among others. Both volumes present scholarship about the 2008 financial crisis in contexts that highlight both continuity and divergence in research. For those who seek insightful perspectives and important details, they demonstrate how corporate finance studies have interpreted recent events and incorporated their lessons. Covers core and newly-developing fields Explains how the 2008 financial crises affected theoretical and empirical research Exposes readers to a wide range of subjects described and analyzed by the best scholars

Download or read book Inflation Expectations written by Peter J. N. Sinclair and published by Routledge. This book was released on 2009-12-16 with total page 402 pages. Available in PDF, EPUB and Kindle. Book excerpt: Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

Download or read book Developments in Macro Finance Yield Curve Modelling written by Jagjit S. Chadha and published by Cambridge University Press. This book was released on 2014-02-06 with total page 571 pages. Available in PDF, EPUB and Kindle. Book excerpt: State-of-the-art research from academics and policymakers on the role of and challenges to monetary policy during the ongoing financial crisis.

Download or read book Markups Gaps and the Welfare Costs of Business Fluctuations written by Jordi Galí and published by . This book was released on 2002 with total page 52 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we present a simple, theory-based measure of the variations in aggregate economic efficiency associated with business fluctuations. We decompose this indicator, which we refer to as 'the gap', into two constituent parts: a price markup and a wage markup, and show that the latter accounts for the bulk of the fluctuations in our gap measure. Finally, we derive a measure of the welfare costs of business cycles that is directly related to our gap variable, and which takes into account explicitly the existence of a varying aggregate inefficiency. When applied to postwar U.S. data, for plausible parametrizations, our measure suggests welfare losses of fluctuations that are of a higher order of magnitude than those derived by Lucas (1987). It also suggests that the major postwar recessions involved substantial efficiency costs.