Scheduled announcements and volatility patterns: The effects of monetary policy committee announcements on LIBOR and short sterling futures and options

Both the UK spot and futures markets in short‐term interest rates are found to react strongly to surprises in the scheduled announcements of the repo rate and RPI. Therefore, these announcements should also affect the market for options on short‐term interest rate futures. Because the repo rate and RPI announcements are scheduled, the options market can predict the days on which announcement shocks may hit, and build this information into its volatility expectations. It is argued that the volatility used in pricing options should alter over time in a predictable nonlinear manner that varies with contract maturity and the number of forthcoming announcements; but is independent of announcement content. The empirical results support this hypothesis. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23:773–797, 2003     

New evidence on the forward unbiasedness hypothesis in the foreign‐exchange market

A large empirical literature has tested the unbiasedness hypothesis in the foreign‐exchange market with the use of forward exchange rates. This article amends the conventional testing framework to exploit the information in currency options, with a newly constructed data set for three major dollar exchange rates. The main results are that (a) tests based on stationary regressions suggest that options provide biased predictions of the future spot exchange rate, and (b) co‐integration–based tests that are robust to several statistical problems afflicting stationary regressions and allow for endogeneity issues arising from a potential omitted risk premium term are supportive of unbiasedness. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:627–656, 2006     

AS‐AD REVISITED: OVERSHOOTING ADJUSTMENT DYNAMICS UNDER NAÏVE EXPECTATIONS

We analyse the adjustment dynamics from a short‐term to a medium‐term equilibrium in a standard AS‐AD model à la Blanchard (2006, Macroeconomics, 4th edn, Prentice‐Hall, Upper Saddle River, NJ) for an open economy with fixed and flexible exchange rates. An explicit analysis suggests the local stability of the medium‐term equilibrium. However, an overshooting adjustment dynamics is possible for the exchange rate, a result that directly relates to the famous Dornbusch (1976, Journal of Political Economy, 84, pp. 1161–1176) analysis. In contrast to the latter, in the Blanchard framework it is obtained without assuming rational expectations and without relying upon saddle‐path stability.     

Pricing American options on foreign currency with stochastic volatility,jumps, and stochastic interest rates

By applying the Heath–Jarrow–Morton (HJM) framework, an analytical approximation for pricing American options on foreign currency under stochastic volatility and double jump is derived. This approximation is also applied to other existing models for the purpose of comparison. There is evidence that such types of jumps can have a critical impact on earlyexercise premiums that will be significant for deep out‐of‐the‐money options with short maturities. Moreover, the importance of the term structure of interest rates to early‐exercise premiums is demonstrated as is the sensitivity of these premiums to correlation‐related parameters. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:867–891, 2007     

Time‐varying market price of risk in the crude oil futures market

In this study, a three‐factor model of crude oil prices is estimated, which incorporates a time‐varying market price of risk. The model is able to accurately capture the term structure of futures prices with evidence suggesting that risk premiums in the crude oil market are time‐varying. Using the cross‐section of futures prices, we estimate a time‐series of the market price of risk in the crude oil market implied by the model. We find that the risk premiums in the crude oil market are driven by the same risk factors as equity and bond markets. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:779–807, 2011     

Predicting monetary policy with federal funds futures prices

In theory, prices of current‐month federal funds futures contracts should reflect market expectations of near‐term movements in the federal funds rate and thus the Federal Reserve's funds rate target. This article shows that futures‐based proxies for funds rate expectations have weak predictive power for the average funds rate using daily data but are more successful in predicting the average funds rate and the funds rate target around target changes and meetings of the Federal Open Market Committee. However, the futures‐based expectations have a systematic bias related to the last days of the month and, in particular, calendar months. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:377–391, 2001     

Risk premiums and predictive ability of BAX futures

This study provides an in‐depth analysis of risk premiums in the Canadian Bankers' Acceptances futures (BAX) market. The predictive regressions for excess and holding‐period returns on BAX futures lend empirical support to the presence of time‐varying risk premiums especially at longer horizons. Despite the evidence of time variation in the risk premium, however, the unbiasedness of the basis as a predictor of spot returns in forecast efficiency regressions cannot be rejected. The out‐of‐sample forecasts of spot returns demonstrate the excellent predictive ability of models that exploit the restrictions implied by the unbiasedness hypothesis. Overall, our findings support the presence of a slowly moving risk premium and entail important practical implications for measuring monetary policy expectations and portfolio allocation. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark     

生命表更新对我国寿险产品保费影响的定量分析

从2006年起,我国寿险产品定价使用新的生命表,这将影响寿险产品保费计算的关键因素——死亡率。本文运用寿险精算理论,从定量角度分析了生命表更新对定期寿险、生存年金和两全保险等基本寿险产品保费的影响。研究结果表明,生命表更新后,定期寿险和两全保险的保费降低了,男性保费的变化幅度小于女性,而对于生存年金,结果恰好相反;保费的变化程度还取决于投保年龄、保险期限、利率和性别等因素。     

Testing the liquidity preference hypothesis using survey forecasts

We evaluate the liquidity preference hypothesis (LPH) for the term structure of interest rates in a different way. Instead of using bond returns as traditional approaches, we use interest rate surveys with market expectations in order to evaluate LPH. This approach allows us to disentangle the effect of the changes in interest rate expectations from the liquidity premium. We found empirical support for the LPH with Brazilian data using both traditional and survey methods. However, the evaluation with interest rate surveys gives a higher statistical confidence level than the traditional approach when we perform tests for term premium monotonicity.     

Sources of variation in holding returns for fed funds futures contracts

This study relates predictable gains from positions in fed funds futures contracts to violations of the expectations hypothesis of the term structure of interest rates. Although evidence for predictable gains from positions in short‐horizon contracts is mixed, we find that gains in longer horizon contracts can be well described using Markov‐switching models, with predictability associated with particular episodes in which economic activity was weak and variability in the returns to these contracts was quite high. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 31:205–229, 2011     

On the Link Between Exchange‐rate Regimes,Capital Controls and Monetary Policy Autonomy in Small European Countries, 1979–2000

We investigate international monetary‐policy transmission under different exchange‐rate and capital‐account regimes in eleven small, open economies during the 1980s and 1990s. We find no systematic link between ex‐post monetary‐policy autonomy and exchange‐rate regimes. Capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks, though not strict autonomy. The results are consistent both with short‐term autonomy for small countries even under fixed exchange rates and an open capital account, and with long‐term dependence under flexible exchange rates and an independent stability target. Results also indicate that euro‐area market interest rates are significantly more responsive to the development of the corresponding US rate than were the previous national rates.     

A two‐mean reverting‐factor model of the term structure of interest rates

This article presents a two‐factor model of the term structure of interest rates. It is assumed that default‐free discount bond prices are determined by the time to maturity and two factors, the long‐term interest rate, and the spread (i.e., the difference) between the short‐term (instantaneous) risk‐free rate of interest and the long‐term rate. Assuming that both factors follow a joint Ornstein‐Uhlenbeck process, a general bond pricing equation is derived. Closed‐form expressions for prices of bonds and interest rate derivatives are obtained. The analytical formula for derivatives is applied to price European options on discount bonds and more complex types of options. Finally, empirical evidence of the model's performance in comparison with an alternative two‐factor (Vasicek‐CIR) model is presented. The findings show that both models exhibit a similar behavior for the shortest maturities. However, importantly, the results demonstrate that modeling the volatility in the long‐term rate process can help to fit the observed data, and can improve the prediction of the future movements in medium‐ and long‐term interest rates. So it is not so clear which is the best model to be used. © 2003 Wiley Periodicals, Inc. Jrl Fut Mark 23: 1075–1105, 2003     

Managerial Performance and Closed‐End Country Fund Premiums: A Lead or Lag Relationship?*

Herein, we examine whether changes in closed‐end country fund premiums lead and/or lag management performance. Using a sample of 46 country funds and a time period of 11 years, we find evidence of a significant negative relationship between past performance and current fund premiums, but no support for the hypothesis that past premiums are indicative of future performance. Furthermore, the above results are driven primarily by the emerging market funds. The difference between emerging market and developed market fund premiums' response to past performance, although less obvious, continues to hold in the crises period, but vanishes in the tranquil period.     

What moves option‐implied bond market expectations?

This article examines the impact of macroeconomic news announcements on bond market expectations, as measured by option‐implied probability distributions of future bond returns. The results indicate that expected bond market volatilities increase in response to higher‐than‐expected inflation and unemployment announcements. Furthermore, the asymmetries in bond market expectations are found to be affected mostly by surprises in inflation and economic production figures. In particular, it is found that higher‐than‐expected inflation announcements cause optionimplied bond return distributions to become more negatively skewed or less positively skewed, implying a shift in market participants' perceptions toward future increases in interest rates. Finally, the results indicate that market expectations of future extreme movements in bond prices are virtually unaffected by macroeconomic news releases. Some evidence is found, however, that suggests that after extreme surprises in inflation announcements market participants attach higher probabilities for extreme movements in bond prices. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:817–843, 2005     

SHIBOR市场预期理论的实证检验

本文使用SHIBOR市场期限为1个月及以上的中长端利率数据,针对由预期理论推导出的三个模型进行了回归检验,提出期限为1个月的利率与其它长端利率的利差是平稳的,但是利差对长短期利率变动的预测与理论不一致,即存在预期迷惑现象,因而拒绝了预期理论;长端利率之间的利差不平稳,因而长端利率整体上不支持预期理论。此外,考虑到回归结果的稳健性,本文还按照不同的方式选取了两组样本数据,通过使用不同的数据仍然可以得到相似的结论,这表明回归结果是在一定程度上是稳健的。对预期理论的背离表明SHIBOR市场中长端利率的变动未能充分反映金融市场资金的供需情况,因而有待进一步发展。     

Nonlinear asymmetric models of the short‐term interest rate

This study introduces a generalized discrete time framework to evaluate the empirical performance of a wide variety of well‐known models in capturing the dynamic behavior of short‐term interest rates. A new class of models that displays nonlinearity and asymmetry in the drift, and incorporates the level effect and stochastic volatility in the diffusion function is introduced in discrete time and tested against the popular diffusion, GARCH, and level‐GARCH models. Based on the statistical test results, the existing models are strongly rejected in favor of the newly proposed models because of the nonlinear asymmetric drift of the short rate, and the presence of nonlinearity, GARCH, and level effects in its volatility. The empirical results indicate that the nonlinear asymmetric models are better than the existing models in forecasting the future level and volatility of interest rate changes. © 2006 Wiley Periodicals, Inc. Jrl Fut Mark 26:869–894, 2006     

The term structure of systematic and idiosyncratic risk

We study the term structure of variance (total risk), systematic, and idiosyncratic risk. Consistent with the expectations hypothesis, we find that, for the entire market, the slope of the term structure of variance is mainly informative about the path of future variance. Thus, there is little indication of a time-varying term premium. Turning the focus to individual stocks, we cannot reject the expectations hypothesis for systematic variance, but we strongly reject it for idiosyncratic variance. Our results are robust to jumps and potential statistical biases.     

The Rise of Fund Managers in Foreign Exchange:Will Fundamentals Ultimately Dominate?

This paper analyses the behaviour and motivation of fund managers in foreign exchange markets reflected in questionnaire evidence. We find that fund managers and FX dealers differ significantly. Fund managers rely more on fundamentals, basically due to their longer forecasting horizons, and reject non‐fundamental influences on exchange rates more than FX dealers. However, neither can fund managers be considered as pure fundamentalists. Non‐fundamentalist positions markedly influence short‐term decision‐making. They inspire ambivalent views about market imperfections and these views seem to become stronger over time. This latter change counterbalances the strengthening fundamental influences resulting from the rise of fund managers.     

Is there information in the volatility skew?

Since the 1987 crash, option prices have exhibited a strong negative skew, implying higher implied volatility for out‐of‐the‐money puts than at‐ and in‐the‐money puts. This has resulted in incorporating multiple jumps and stochastic volatility within the data generating process to improve the Black–Scholes model in an attempt to capture negative skewness and a highly leptokurtic distribution. The general conclusion is that there is a large jump premium in the short term, which best explains the significant negative skew for short maturity options. Alternative explanations for the negative skew are related to market liquidity driven by demand shocks and supply shortages. Regardless of the explanation for the negative skew, we assess the information content in the shape of the skew to infer if the option market can accurately forecast stock market crashes and/or spikes upward. We demonstrate, using all options on the S&P 100 from 1984–2006, that the shape of the skew can reveal with significant probability when the market will crash or spike. However, we find the magnitude of the spike prediction is not economically significant. Our findings are strongest for the short‐term out‐of‐the money puts, consistent with the notion of investors' aversion to large negative movements. We also find that the power of the crash/spike prediction decreases with an increase in the time to option maturity. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:921–959, 2007     

SOCIAL DISCOUNTING AND THE LONG RATE OF INTEREST

The well‐known theorem of Dybvig, Ingersoll, and Ross shows that the long zero‐coupon rate can never fall. This result, which, although undoubtedly correct, has been regarded by many as surprising, stems from the implicit assumption that the long‐term discount function has an exponential tail. We revisit the problem in the setting of modern interest rate theory, and show that if the long “simple” interest rate (or Libor rate) is finite, then this rate (unlike the zero‐coupon rate) acts viably as a state variable, the value of which can fluctuate randomly in line with other economic indicators. New interest rate models are constructed, under this hypothesis and certain generalizations thereof, that illustrate explicitly the good asymptotic behavior of the resulting discount bond systems. The conditions necessary for the existence of such “hyperbolic” and “generalized hyperbolic” long rates are those of so‐called social discounting, which allow for long‐term cash flows to be treated as broadly “just as important” as those of the short or medium term. As a consequence, we are able to provide a consistent arbitrage‐free valuation framework for the cost‐benefit analysis and risk management of long‐term social projects, such as those associated with sustainable energy, resource conservation, and climate change.