Spot and forward rates in the Canadian treasury bill market

The efficiency of the Canadian Treasury bill market is examined with data on spot and forward rates of return. Over the period from 7/62 to 3/79, the bill market has been efficient in the sense that it correctly uses the information contained in past spot rates in assessing the expected future spot rate and in determining the forward rate. Moreover, the forward rate is found to contain some information about future spot rates above and beyond that in past spot rates.     

THE INFORMATION CONTENT AND USEFULNESS OF THE TERM STRUCTURE OF THE NEW ZEALAND BANK BILL MARKET

This paper applies the rationality concept and expectations hypothesis to test the information efficiency of the term structure of the New Zealand bank bill market. Weekly data is collected from June 1986 to November 1988. The sample period is partitioned into two subperiods by the sharemarket crash in October 1987. The empirical results suggest the presence of a time varying risk premium. This is reflected by the significantly positive volatility measure in the first subperiod and the significant interest rate level variable in both subperiods. The forecast errors correlate significantly with the growth in money supply and overseas interest rate variables. Factors other than market information inefficiency could be responsible for the significant correlation; namely the impact of the sharemarket crash on market perceptions about inflation expectations and the non-simultaneous data problem in calculating the differential costs of borrowing. Despite the rejection of the joint hypothesis, forward rates are found to have information about future spot rates beyond that contained in past spot rates, and are able to predict interest rates at least 30 days ahead.     

Forward and spot exchange rates

There is a general consensus that forward exchange rates have little if any power as forecasts of future spot exchange rates. There is less agreement on whether forward rates contain time varying premiums. Conditional on the hypothesis that the forward market is efficient or rational, this paper finds that both components of forward rates vary through time. Moreover, most of the variation in forward rates is variation in premium, and the premium and expected future spot rate components of forward rates are negatively correlated.     

Do forecast errors or term premia really make the difference between long and short rates?

Forward rates in the term structure of interest contain predictions of future spot rates plus (possibly) term premia. Realized spot rates contain predicted spot rates plus forecast errors. Under rational expectations forecast errors are not predictable. By forecasting spot rates using publicly available information, bounds on the variation of forecast errors, and term premia are obtained. For one-month treasury bill rates, one to two thirds of the variation in the difference between forward rates and realized spot rates is due to variation in term premia.     

Effects of speculation and interest rates in a “carry trade” model of commodity prices

The paper presents and estimates a model of the prices of oil and other storable commodities, a model that can be characterized as reflecting the carry trade. It focuses on speculative factors, here defined as the trade-off between interest rates on the one hand and market participants' expectations of future price changes on the other hand. It goes beyond past research by bringing to bear new data sources: survey data to measure expectations of future changes in commodity prices and options data to measure perceptions of risk. Some evidence is found of a negative effect of interest rates on the demand for inventories and thereby on commodity prices and positive effects of expected future price gains on inventory demand and thereby on today's commodity prices.     

Scaling behaviour of Treasury rates in India

This study finds that the scaling properties of India’s nominal and real Treasury rates are time varying, as is their multiscaling behaviour. We observe an association between the scaling behaviour of interest rates and the stages of development of the bill market. Interest rate behaviour is influenced by structural reforms, microstructure changes, and improvement in the operational efficiency of the Treasury market. Our findings suggest that monetary policy shocks have a persistent effect, but rates eventually revert to the mean. We show that the adaptive market hypothesis helps to delineate the dynamics of an emerging market undergoing a series of institutional and structural changes.     

The effect of real rates of interest on housing prices

During the late 1970s, U.S. house prices were appreciating rapidly even though mortgage interest rates were climbing. Recently, interest rates have eased but prices have moderated. This study examines the role of appreciation expectations in overcoming the negative effects of nominal mortgage interest rates on house prices. Expectations of future appreciation are important determinants of house sales prices, remaining influential during periods of declining and moderating real prices, not just when prices are rising. The real rate of interest, as viewed by the homebuyer, is the mechanism for affecting change in housing price levels. Because the nominal interest rate is slow to reflect changes in expectations, these real rates vary over time. This ebb and flow of real interest rates appears to explain market price levels. Nominal rates play a role as well, primarily in the formation of appreciation expectations.     

The Relation Between Default-Free Interest Rates and Expected Economic Growth Is Stronger Than You Think

The relation between default-free interest rates and expected economic growth is substantially stronger than suggested by extant literature. Futures-implied Treasury bill yield spreads are more highly correlated with future real consumption, investment, and GNP growth than spot spreads. This stronger relation arises because using futures removes a component of the spot term structure that covaries negatively with real economic growth. Treasury forward rates from spot bills contain a premium for the risk that short-sellers will default. This risk premium is negatively related to expected economic growth.     

New No-arbitrage Conditions and the Term Structure of Interest Rate Futures

Interest rate futures are basic securities and at the same time highly liquid traded objects. Despite this observation, most models of the term structure of interest rate assume forward rates as primary elements. The processes of futures prices are therefore endogenously determined in these models. In addition, in these models hedging strategies are based on forward and/or spot contracts and only to a limited extent on futures contracts. Inspired by the market model approach of forward rates by Miltersen, Sandmann, and Sondermann (J Finance 52(1); 409–430, 1997), the starting point of this paper is a model of futures prices. Using, as the input to the model, the prices of futures on interest related assets new no-arbitrage restrictions on the volatility structure are derived. Moreover, these restrictions turn out to prevent an application of a market model based on futures prices.     

Bond price representations and the volatility of spot interest rates

A common approach to modeling the term structure of interest rates in a single-factor economy is to assume that the evolution of all bond prices can be described by the current level of the spot interest rate. This article investigates the restrictions that this assumption imposes. Specifically, we show that this Markovian restriction, together with the no-arbitrage requirement, curtails the relationship of forward rates and their volatilities relative to spot-rate volatilities. Among such Markovian models, only a few provide simple analytical relationships between bond prices and the spot interest rate. This article identifies the class of spot-rate volatility specifications that permit simple analytical linkages to be derived between bond prices and interest rates. Included in the class are the volatility structures used by Vasicek and by Cox, Ingersoll, and Ross. Surprisingly, no other volatility structures permit simple analytical representations.     

Floating exchange rates,expectations and new information

This paper analyzes the relationship between forward exchange rates, future spot rates and new information. A stochastic model of exchange rate determination is used to formally show how unanticipated changes in the exchange rate determinants (or ‘news’) affect the spot rate. The empirical analysis indicates that ‘new information’ plays an important role in explaining the market forecasting error, or difference between the spot rate and the forward rate, determined in the previous period.     

International market response to announcements of US macroeconomic data

This paper presents empirical evidence relating the announcement effects of US money supply and inflation (CPI and PPI) to Eurocurrency interest rates and the foreign currency markets (both spot and forward) for seven industrial countries over the period 1977–1982. The results indicate that unanticipated components of announced changes in money supply have a significant positive effect on Eurocurrency interest rates and a negative effect (implying dollar appreciation) on the spot exchange rates. Unanticipated changes in PPI have a positive significant effect on interest rates, a small surprisingly negative impact on spot exchange rates, and a positive effect on gold prices. The CPI has no effect on either market.     

Temporal Patterns in Foreign Exchange Returns and Options

Although the foreign exchange market is believed to be one of the most efficient financial markets in the world, there is significant evidence that technical analysis is profitable in this market. In this study we investigate the ability of information from the options market to supplement the commonly used information on past prices to predict temporal patterns in foreign exchange returns. We find that strategies using information from at-the-money options were more consistently profitable than the commonly used strategies based on only historical spot exchange rates (past prices). Consequently, options appear to contain information regarding future spot exchange rate movements.     

The Canadian treasury bill auction and the term structure of interest rates

This paper examines the efficiency of the Canadian treasury bill market as measured by the performance of the expectations model of the term structure of interest rates. In particular, market efficiency is shown to depend upon certain institutional features of the treasury bill auction process. Building on past work by B. Campbell and J.W. Galbraith [Oxford Bulletin of Economics and Statistics 59 (2) (1997) 265–284], the paper establishes links between rejections of efficiency and high absolute values of the spread between six- and three-month interest rates. The major contribution of the paper is to then show that a link exists between weeks in which spreads are large and weeks in which accepted auction yields show a large degree of dispersion. The paper discusses the implications of these findings for the term structure literature and for possible auction configurations currently under consideration in Canada and the US.     

Fitting the term structure of interest rates for Taiwanese government bonds

The term structure of interest rates provides a basis for pricing fixed-income securities and interest rate derivative securities as well as other capital assets. Unfortunately, the term structure is not always directly observable because most of the substitutes for default-free bonds are not pure discount bonds. We use curve fitting techniques with the observed government coupon bond prices to estimate the term structure. In this paper, the B-spline approximation is used to estimate the Taiwanese Government Bond (TGB) term structure. We apply the B-spline functions to approximate the discount function, spot yield curve, and forward yield curve respectively. Among the three approaches, the discount fitting approach and the spot fitting approach are reasonable and reliable, but the spot fitting approach achieves the most suitable fit. Using this methodology, we can investigate term structure fitting problems, identify coupon effects, and analyze factors which drive term structure fluctuations in the TGB market.     

中国利率市场的价格发现——对国债现货、期货以及利率互换市场的研究

本文采用信息份额模型和基于向量自回归(VAR)模型的格兰杰因果检验,研究了国债现货、国债期货和利率互换三个市场之间的价格发现机制。信息份额模型表明,从整体来看利率互换相对于国债期货和国债现货都具有信息优势,而国债期货相对于国债现货具有信息优势。另外,国债期货的价格发现能力相对于另外两个市场都在随时间增强。格兰杰因果检验结果显示,利率互换在价格发现中单向引领国债期货以及国债现货,国债期货单向引领国债现货。所有结果一致表明, 利率互换和国债期货这两种利率衍生产品在引导中国利率市场价格发现中发挥了重要作用。     

Changes in Expected Security Returns,Risk, and the Level of Interest Rates

Regressions of security returns on treasury bill rates provide insight about the behavior of risk in rational asset pricing models. The information in one-month bill rates implies time variation in the conditional covariances of portfolios of stocks and fixed-income securities with benchmark pricing variables, over extended samples and within five-year subperiods. There is evidence of changes in conditional “betas” associated with interest rates. Consumption and stock market data are examined as proxies for marginal utility, in a general framework for asset pricing with time-varying conditional covariances.     

The information in the term structure

This paper presents a regression approach to measuring the information in forward interest rates about time varying premiums and future spot interest rates. Like earlier work, the regressions identify variation in the expected premiums on longer-maturity Treasury bills. The more novel evidence concerns the forecasts of future spot rates in forward rates. The regressions provide evidence that the one-month forward rate has power to predict the spot rate one month ahead. During periods preceding 1974, forward rates have reliable forecast power for one-month spot rates up to five months in the future.     

票据市场利率体系及其与银行间货币市场整体利率的关系

我国的商业汇票利率体系主要由承兑费率、贴现利率、转贴现利率和再贴现利率构成。其中作为银行间市场业务的票据转贴现，其利率已实现市场化。在监管部门加大力度规范会计科目核算、严查逃避信贷规模的票据业务后，买断性日趋明显，其利率更多受到信贷规模影响，与其它银行间货币市场利率产生了一定背离；回购式转贴现业务则逐步脱离规模互转方式，近期呈现了较强的资金业务特性，利率水平逐步接轨其它银行间货币市场利率。     

Forecasting the past: the case of US interest rate forecasts

This study evaluates 10-year US government bond yield forecasts and three-month US Treasury bill rate forecasts for the period between October 1989 and December 2004. In total, 136 forecast time series with approximately 13,800 forecast data were scrutinized, making this the most extensive analysis of interest rate forecasts to date. Not one of the forecast time series proved to be unbiased. In the majority of cases, information from the past was not efficiently integrated into the forecasts. The sign accuracy is significantly better than random walk forecasts in only a very few of the forecast time series. The modified Diebold–Mariano test for forecast encompassing reveals that the information content of most of the forecast time series is lower than that of the naïve forecasts, the simple ARIMA models, the implicit forward rates, or average interest rate expectations. The forecasting process is dominated by the present and past market situation.