Short Rate Dynamics and Regime Shifts*

We characterize the dynamics of the US short‐term interest rate using a Markov regime‐switching model. Using a test developed by Garcia, we show that there are two regimes in the data: In one regime, the short rate behaves like a random walk with low volatility; in another regime, it exhibits strong mean reversion and high volatility. In our model, the sensitivity of interest rate volatility to the level of interest rate is much lower than what is commonly found in the literature. We also show that the findings of nonlinear drift in Aït‐Sahalia and Stanton, using nonparametric methods, are consistent with our regime‐switching model.     

Modeling the conditional mean and variance of the short rate using diffusion,GARCH, and moving average models

This article introduces a two‐factor‐discrete‐time‐stochastic‐volatility model that allows for departures from linearity in the conditional mean and incorporates serially correlated unexpected news, asymmetry, and level effects into the definition of conditional volatility of the short rate. The new class of econometric specifications nests many popular existing symmetric and asymmetric GARCH as well as diffusion models of the short‐term interest rate. This study attempts to determine the correct specification of conditional mean and variance of the short rate by developing a more general econometric framework that allows for nonlinear effects in the drift of the short rate, and that defines the conditional volatility as a nonlinear function of unexpected information shocks and interest rate levels. The existing and alternative models are compared in terms of their ability to capture the stochastic behavior of the short‐term riskless rate. The empirical results indicate that the relative performance of the two‐factor models in predicting the future level and variance of interest‐rate changes is superior to the nested models. © 2000 John Wiley & Sons, Inc. Jrl Fut Mark 20:717–751, 2000     

Common risk factors in the U.S. and UK interest rate swap markets: Evidence from a nonlinear vector autoregression approach

This paper produces evidence in support of the existence of common risk factors in the U.S. and UK interest rate swap markets. Using a multivariate smooth transition autoregression (STVAR) framework, we show that the dynamics of the U.S. and UK swap spreads are best described by a regime‐switching model. We identify the existence of two distinct regimes in U.S. and UK swap spreads; one is characterized by a “flat” term structure of U.S. interest rates and the other is characterized by an “upward” sloping U.S. term structure. In addition, we show that there exist significant asymmetries on the impact of the common risk factors on the U.S. and UK swap spreads. Shocks to UK oriented risk factors have a strong effect on the U.S. swap markets during the “flat” slope regime but a very limited effect otherwise. On the other hand, U.S. risk factors have a significant impact on the UK swap markets in both regimes. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:221–250, 2004     

Markov switching GARCH models of currency turmoil in Southeast Asia

This paper analyzes exchange rate turmoil with a Markov switching GARCH model. We distinguish between two different regimes in both the conditional mean and the conditional variance: “ordinary” regime, characterized by low exchange rate changes and low volatility, and “turbulent” regime, characterized by high exchange rate devaluation and high volatility. We also allow the transition probabilities to vary over time as functions of economic and financial indicators. We find that real effective exchange rates, money supply relative to reserves, stock index returns, and bank stock index returns and volatility contain valuable information for identifying turbulent and ordinary periods.     

THE IMPORTANCE OF THE RETENTION RATIO IN A KALECKIAN MODEL WITH DEBT ACCUMULATION

By using a Kaleckian model with debt accumulation, Hein (2007; Metroeconomica, 56 (2), pp. 310–39) found that the long‐run equilibrium value of the debt–capital ratio is positive and stable only if interest rates are extremely high and if the short‐run equilibrium exhibits the ‘debt‐led’ growth regime. However, this conclusion crucially depends on the assumption that the retention ratio of firms is equal to unity. By relaxing this assumption, we show that there exists a positive and stable long‐run equilibrium even under the ‘debt‐burdened’ regime without any constraint on the nominal interest rate.     

The use of term structure information in the hedging of mortgage‐backed securities

This article examines the importance of term structure variables in the hedging of mortgage‐backed securities (MBS) with Treasury futures. Koutmos, G., Kroner, K., and Pericli, A. (1998) find that the optimal hedge ratio is time varying; we determine the effect of yield levels and slopes on this variation. As these variables are closely tied with mortgage refinancing, intuition suggests them to be relevant determinants of the hedge ratio. It was found that a properly specified model of the time varying hedge ratio that excludes the level and slope of the yield curve from the information set would provide similar out‐of‐sample hedging results to a model in which term structure information is included. Thus, both the level of interest rates and the slope of the yield curve are unimportant variables in determining the empirically optimal hedge ratio between MBS and Treasury futures contracts. © 2005 Wiley Periodicals, Inc. Jrl Fut Mark 25:661–678, 2005     

Pricing VIX futures: Evidence from integrated physical and risk‐neutral probability measures

This study derives closed‐form solutions to the fair value of VIX (volatility index) futures under alternate stochastic variance models with simultaneous jumps both in the asset price and variance processes. Model parameters are estimated using an integrated analysis of integrated volatility and VIX time series from April 21, 2004 to April 18, 2006. The stochastic volatility model with price jumps outperforms for the short‐dated futures, whereas additionally including a state‐dependent volatility jump can further reduce out‐of‐sample pricing errors for other futures maturities. Finally, adding volatility jumps enhances hedging performance except for the short‐dated futures on a daily‐rebalanced basis. © 2007 Wiley Periodicals, Inc. Jrl Fut Mark 27:1175–1217, 2007     

Factors explaining movements in the implied volatility surface

This article explores the relationship of changes in the S&P 500 index implied volatility surface to economic state variables. Observable variables can explain some of the variation in implied volatility, with the majority of explanatory power from index returns. Although the contemporaneous return is most important for explaining changes in short dated volatility, the path of the index is important for explaining changes in long dated volatility. Other variables also display statistically significant relations to volatility changes. Shocks to the Nikkei 225, short‐term interest rates, and the corporate/government bond yield spread are correlated with small, systematic changes in implied volatility. The results suggest a multifactor model for market volatility, with factors other than index returns adding negligible explanatory ability. © 2002 Wiley Periodicals, Inc. Jrl Fut Mark 22:915–937, 2002     

Equity volatility,bond yields,and yield spreads

This study examines the impact of implied and contemporaneous equity market volatility on Treasury yields, corporate bond yields, and yield spreads over Treasuries. The CBOE VIX is the measure of implied volatility, and the measure of contemporaneous volatility is constructed using intraday squared S&P 500 returns. We find that bond yields and spreads respond to changes in equity market volatility in a manner consistent with a flight‐to‐quality effect. Both short‐ and long‐term Treasury yields fall in response to increases in implied volatility, and the yield curve flattens modestly. Yields on short‐term investment grade bonds fall in response to contemporaneous volatility shocks, while long‐term spreads on low‐quality issues widen. This indicates that investors “look ahead” in anticipation of changes in equity market volatility but respond more strongly to changes in contemporaneous market activity. © 2011 Wiley Periodicals, Inc. Jrl Fut Mark     

货币政策的利率期限结构效应的理论解释及其经验证据

文章首先运用一个利率期限结构的预期理论模型,证明了“在预期假说框架内货币政策只能引起收益率曲线平行移动而不会改变它的坡度”这一论断是错误的;接下来运用一个局部均衡模型在利率期限结构的预期理论框架下,证明了货币政策行动模式（参数）会影响货币政策对市场利率的影响效果、利率期限结构（收益率曲线）的斜率及其动态特征;之后用一个基于中关两国比较的经验证据说明上述理论解释的可靠性。     

Optimal Futures Hedging Under Multichain Markov Regime Switching

Most of the existing Markov regime switching GARCH‐hedging models assume a common switching dynamic for spot and futures returns. In this study, we release this assumption and suggest a multichain Markov regime switching GARCH (MCSG) model for estimating state‐dependent time‐varying minimum variance hedge ratios. Empirical results from commodity futures hedging show that MCSG creates hedging gains, compared with single‐state‐variable regime‐switching GARCH models. Moreover, we find an average of 24% cross‐regime probability, indicating the importance of modeling cross‐regime dynamic in developing optimal futures hedging strategies. © 2012 Wiley Periodicals, Inc. Jrl Fut Mark 34:173–202, 2014     

Predicting Interest Rate Volatility Using Information on the Yield Curve

This study examines whether information on the yield curve is useful for predicting volatility of the yield curve. The information is used within dynamic models by specifying the covariance matrix of changes in yield factors as nonlinear functions of the factors. Using such models, it is found that the information (i) is useful for predicting volatility of the slope factor, achieving the accuracy comparable with the GARCH model; (ii) has incremental value for predicting volatility of the curvature factor when combined with a volatility‐specific factor; and (iii) does not much improve prediction of volatility of the level factor once the volatility‐specific factor is introduced.     

Monetary policy and long‐term interest rates: Evidence from the U.S. economy

This paper addresses the ability of central banks to affect the structure of interest rates. We assess the causal relationship between the short‐term Effective Federal Funds Rate (FF) and long‐term interest rates associated with both public and private bonds and specifically, the 10‐Year Treasury Bond (GB10Y) and the Moody's Aaa Corporate Bond (AAA). To do this, we apply Structural Vector Autoregressive models to U.S. monthly data for the 1954–2018 period. Based on results derived from impulse response functions and forecast error variance decomposition, we find: a bidirectional relationship when GB10Y is considered as the long‐term rate and a unidirectional relationship that moves from short‐ to long‐term interest rates when AAA is considered. These conclusions show that monetary policy is able to permanently affect long‐term interest rates and the central bank has a certain degree of freedom in setting the levels of the short‐term policy rate.     

Yield Curve Risk in Japanese Government Bond Markets

This paper characterizes the nature of yield curve risk in the Japanese government bond (JGB) market, and explores the effectiveness of risk management based on a linear factor representation of yield curve risk. The implied optimal hedges against factor risk are related to duration‐based hedging strategies, which are shown in many cases to be substantially sub‐optimal. In addition, the drift over time in optimal hedge ratios due to the local nature of optimal hedging is investigated. The results show substantial drift especially for the weights on the factor representing the risk of a changing slope of the JGB yield curve. Though our focus is on government bond markets, the findings have implications for risk management for most interest‐sensitive instruments, especially those that are priced relative to government bonds (e.g. corporate bonds).     

A Markov regime switching approach for hedging stock indices

In this paper we describe a new approach for determining time‐varying minimum variance hedge ratio in stock index futures markets by using Markov Regime Switching (MRS) models. The rationale behind the use of these models stems from the fact that the dynamic relationship between spot and futures returns may be characterized by regime shifts, which, in turn, suggests that by allowing the hedge ratio to be dependent upon the “state of the market,” one may obtain more efficient hedge ratios and hence, superior hedging performance compared to other methods in the literature. The performance of the MRS hedge ratios is compared to that of alternative models such as GARCH, Error Correction and OLS in the FTSE 100 and S&P 500 markets. In and out‐of‐sample tests indicate that MRS hedge ratios outperform the other models in reducing portfolio risk in the FTSE 100 market. In the S&P 500 market the MRS model outperforms the other hedging strategies only within sample. Overall, the results indicate that by using MRS models market agents may be able to increase the performance of their hedges, measured in terms of variance reduction and increase in their utility. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:649–674, 2004     

我国医疗保健行业股指收益率波动特征与杠杆效应

本文运用SWARCH模型分析了我国医疗保健板块收益率的波动,并将医疗保健板块收益率与上证综指、深证成指收益率的SWARCH模型的估计结果进行比较,得出以下结论:医疗保健指数收益率序列呈现出低、中、高三种波动状态,样本区间主要分布于中波动状态,低波动状态的平均持续期最长、中波动状态的平均持续期居中、高波动状态的平均持续期最短,医疗保健指数收益率波动杠杆效应显著;我国股市医疗保健板块收益率波动状态之间的差异高于沪深综指波动状态的差异,医疗保健指数收益率与沪深综指收益率区制转移趋同,但存在着细微差异;医疗保健指数收益率各区制间转移相对频繁,每种波动状态的平均持续期较短,股市医疗保健板块收益率对新信息的反应更为敏感。     

Determinants of Japanese Yen interest rate swap spreads: Evidence from a smooth transition vector autoregressive model

This study investigates the determinants of variations in the yield spreads between Japanese yen interest rate swaps and Japan government bonds for a period from 1997 to 2005. A smooth transition vector autoregressive (STVAR) model and generalized impulse response functions are used to analyze the impact of various economic shocks on swap spreads. The volatility based on a GARCH (generalized autoregressive conditional heteroskedasticity) model of the government bond rate is identified as the transition variable that controls the smooth transition from a high volatility regime to a low volatility regime. The break point of the regime shift occurs around the end of the Japanese banking crisis. The impact of economic shocks on swap spreads varies across the maturity of swap spreads as well as regimes. Overall, swap spreads are more responsive to the economic shocks in the high volatility regime. Moreover, a volatility shock has profound effects on shorter maturity spreads, whereas the term structure shock plays an important role in impacting longer maturity spreads. Results of this study also show noticeable differences between the nonlinear and linear impulse response functions. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:82–107, 2008     

Credit cycle dependent spread determinants in emerging sovereign debt markets

We address credit cycle dependent sovereign credit risk determinants. In our model, the spread determinants' magnitude is conditional on an unobservable endogenous sovereign credit cycle as represented by the underlying state of a Markov regime switching process. Our explanatory variables are motivated in the tradition of structural credit risk models and include changes in asset prices, interest rates, implied market volatility, gold price changes and foreign exchange rates. We examine daily frequency variations of U.S. dollar denominated Eurobond credit spreads of four major Latin American sovereign bond issuers (Brazil, Colombia, Mexico and Venezuela) with liquid bond markets during March 2000 to June 2011. We find that spread determinants are statistically significant and consistent with theory, while their magnitude remarkably varies with the state of the credit cycle. Crisis states are characterized by high spread change uncertainty and high sensitivities with respect to the spread change determinants. We further document that not only changes of local currencies, but also changes of the Euro with respect to the U.S. dollar are significant spread drivers and argue that this is consistent with the sovereigns' ability to pay.     

Switching asymmetric GARCH and options on a volatility index

Few proposed types of derivative securities have attracted as much attention and interest as option contracts on volatility. Grunbichler and Longstaff (1996) is the only study that proposes a model to value options written on a volatility index. Their model, which is based on modeling volatility as a GARCH process, does not take into account the switching regime and asymmetry properties of volatility. We show that the Grunbichler and Longstaff (1996) model underprices a three‐month option by about 10%. A Switching Regime Asymmetric GARCH is used to model the generating process of security returns. The comparison between the switching regime model and the traditional uni‐regime model among GARCH, EGARCH, and GJR‐GARCH demonstrates that a switching regime EGARCH model fits the data best. Next, the values of European call options written on a volatility index are computed using Monte Carlo integration. When comparing the values of the option based on the Switching Regime Asymmetric GARCH model and the traditional GARCH specification, it is found that the option values obtained from the different processes are very different. This clearly shows that the Grunbichler‐Longstaff model is too stylized to be used in pricing derivatives on a volatility index. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:251–282, 2004     

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