An analysis of nonlinearities in term premiums and forward rates

Previous studies often assume a linear relation between term premiums on Treasury securities and forward interest rates even though a nonlinear relation is a theoretical and an empirical possibility. To examine the relation, this paper uses a nonparametric kernel approach that permits both linear and nonlinear associations. The linear specification yields conditional expectations of term premiums that are similar to those predicted by the kernel approach only at the mean forward premiums. Generally, kernel estimation shows that the responses of expected term premiums to changes in forward premiums are time-varying and are significantly different from the constant slope coefficients produced by linear estimations. The evidence also shows that forward premiums contain much more information content for predicting future term premiums that has been found with linear estimation procedures.     

Credit variance risk premiums

This paper studies variance risk premiums in the credit market using a novel data set of swaptions quotes on the CDX North America Investment Grade and High-Yield indices. The returns of credit variance swaps are negative and economically large, irrespective of the credit rating class. They are robust to transaction costs and cannot be explained by established risk factors and structural model variables. We also dissect the overall variance risk premium into receiver and payer variance risk premiums. We show that credit variance risk premiums are mainly driven by the payer corridor, which is associated with worsening macroeconomic conditions.     

Variance risk premiums in foreign exchange markets

Based on the theory of static replication of variance swaps we assess the sign and magnitude of variance risk premiums in foreign exchange markets. We find significantly negative risk premiums when realized variance is computed from intraday data with low frequency. As a likely consequence of microstructure effects however, the evidence is ambiguous when realized variance is based on high-frequency data. Common to all estimates, variance risk premiums are highly time-varying and inversely related to the risk-neutral expectation of future variance.When we test whether variance risk premiums can be attributed to classic risk factors or fear of jump risk, we find that conditional premiums remain significantly negative. However, we observe a strong relationship between the size of log variance risk premiums and the VIX, the TED spread and the general shape of the implied volatility function of the corresponding currency pair. Overall, we conclude that there is a separately priced variance risk factor which commands a highly time-varying premium.     

THE COUPON EFFECT ON TERM PREMIUMS

Monthly holding period returns for U.S. Treasury bills and notes of identical maturity indicate a significant coupon effect upon term premiums. Hotelling's T² test of the vectors of mean term premiums indicates that term premiums are not statistically significant for notes but are significant for bills. Mean-variance and stochastic dominance criteria indicate an investment preference for bills over notes on a pretax basis. Because the data set is Treasury bills and notes, which are identical except for coupon level, these results are evidence of a coupon effect on term premiums.     

Term premiums and default premiums in money markets

There are time-varying term and default premiums in the expected returns on money market securities. Default premiums decline with maturity and tend to be higher during recessions. Term premiums tend to increase with maturity during good times, but humps and inversions in the term structure of expected returns are common during recessions. Treasury bills produce positive average term premiums for the overall sample, but average term premiums for private-issuer securities are close to 0.0. A general conclusion is that variation in forward rates is primarily variation in current epected returns rather than in forecasts of changes in interest rates.     

Risk,uncertainty, and asset prices

We identify the relative importance of changes in the conditional variance of fundamentals (which we call “uncertainty”) and changes in risk aversion in the determination of the term structure, equity prices, and risk premiums. Theoretically, we introduce persistent time-varying uncertainty about the fundamentals in an external habit model. The model matches the dynamics of dividend and consumption growth, including their volatility dynamics and many salient asset market phenomena. While the variation in price–dividend ratios and the equity risk premium is primarily driven by risk aversion, uncertainty plays a large role in the term structure and is the driver of countercyclical volatility of asset returns.     

From T-Bills to Stocks: Seasonal Anomalies Revisited

This paper employed eleven data series which consist of stocks, bonds, bills, equity premiums, term premiums, and various default premiums to investigate whether January seasonality reported in existing literature is robust across different states of the economy as this has important trading implications. For the periods 1926–1990, small stocks, small stock premiums, low grade bonds, and default premiums (spread between high grade, low grade and government bonds) reveal January seasonality and that the seasonality is robust across different states of the economy except for low grade bond returns and default premiums. January seasonality for low grade bond returns and low grade bond default premiums are primarily driven by results found during periods of economic expansion. Overall, January seasonality is more evident during the economic expansion periods although the magnitude of default premiums is larger during periods of economic contraction. Furthermore, prior findings of strong summer equity returns are primarily driven by the results found during the periods of economic contraction. It is also found that equity returns are generally higher during periods of economic expansion.     

How Much Is Too Much: Are Merger Premiums Too High?

Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long‐run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long‐run post merger underperformance.     

Risk management of deposit insurance corporations with risk-based premiums and credit default swaps

In this paper, we propose a risk-based model for deposit insurance premiums and provide the closed-form formula for premiums, including early closure, capital forbearance, interest rate risk, and moral hazard. Our numerical analysis confirms the proposed pricing formula and the relative impact of the provisions for deposit insurance premiums. We illustrate how to use credit default swaps (CDSs) to manage the bank’s asset risk corresponding to the deposit insurance model. A failed bank, Washington Mutual, is used to demonstrate how to calibrate the model’s parameters and calculate fair premiums that are consistent with market risks on the basis of our proposed model and credit derivatives. Finally, a numerical experiment is designed to determine the optimal hedge ratio, which can minimise the variance of cash-flow of the deposit insurance corporations.     

Multivariate Analysis of Premium Dynamics in P&L Insurance

This article studies the dynamic relationship between premiums and losses on the U.S. property–casualty insurance market, accounting for the external impacts of GDP and interest rate. Compared to the existing literature, the present work innovates in that the dynamic relationships between premiums, losses, GDP, and interest rate are studied in a cointegration framework, single‐equation and vector approach, involving the long‐ and short‐run dynamics. The results suggest a stable long‐run equilibrium between premiums, losses, and general economy. On short term, the premiums adjust quickly and significantly to the long‐term disequilibrium and have a strong autoregressive behavior. External factors contribute to explain the dynamics of premiums.     

A production-based model for the term structure

This paper considers the term structure of interest rates implied by a production-based asset pricing model in which the fundamental drivers are investment in equipment and structures as well as inflation. The model matches the average yield curve up to five-year maturity almost perfectly. Longer term yields are roughly as volatile as in the data. The model also generates time-varying bond risk premiums. In particular, when running Fama-Bliss regressions of excess returns on forward premiums, the model produces slope coefficients of roughly half the size of the empirical counterparts. Closed-form expressions highlight the importance of the capital depreciation rates for interest rate dynamics.     

临时保险制度：赔付理由、期间及其限制

我国《保险法》未规定临时保险制度,本文建议,我国的临时保险制度应当分为强制临时保险与自愿临时保险两种,在保险人预收保险费的情况下,根据履行提前、对价平衡、合理期待等理论,保险人应当对临时保险事故予以赔付,此种临时保险的期间自投保人交付保险费之时起算,于正式保险生效之时或投保人收到拒保通知书并由保险人退还保险费之时终止;...     

Zur Quantifizierung der Risikoprämien deutscher Versicherungsaktien im Kontext eines Multifaktorenmodells

In this contribution we present an empirical study that focuses on the relationship between risk and return for a universe of insurance Stocks in Germany during the period 1975–1998. The study was conducted using a multi factor model. The proportion of explained variance ranges from 9.29% to 13.62% in the monthly regressions. We found a significant and negative relationship between changes in the term structure of interest rates and the risk premiums for insurance Stocks. Also significant is the exchange rate of the Deutsche Mark against the US-Dollar.     

交易所国债期限风险溢价的实证研究

本文考察了上海证券交易所国债期限风险溢价的时间变化特征及决定因素。实证结果显示，债券剩余期限越长，平均风险溢价越高；通过对不同期限债券组合的风险溢价序列建立回归模型，发现长短期利差及风险溢价的前期值对中长期债券期限风险溢价的时变性具有明显的解释能力。     

Properties of foreign exchange risk premiums

We study the properties of foreign exchange risk premiums that can explain the forward bias puzzle, defined as the tendency of high-interest rate currencies to appreciate rather than depreciate. These risk premiums arise endogenously from the no-arbitrage condition relating the term structure of interest rates and exchange rates. Estimating affine (multi-currency) term structure models reveals a noticeable tradeoff between matching depreciation rates and accuracy in pricing bonds. Risk premiums implied by our global affine model generate unbiased predictions for currency excess returns and are closely related to global risk aversion, the business cycle, and traditional exchange rate fundamentals.     

Yield Spread and Term to Maturity: Default vs. Liquidity

The aim of this paper is the analysis of the yield spreads between Treasury and non–Treasury Spanish fixed income assets and its relationship with the term to maturity. We find a downward sloping term structure of yield spreads for investment–grade bonds that seems to be contrary to the 'crisis at maturity' theory. However, we claim that this outcome is caused mainly by the effect of liquidity on yield spreads. Once the effect of liquidity and other factors are removed we find that there is a positive relationship between default premiums and term to maturity. That result is now consistent with the existing literature.     

Ex Ante Bond Returns and the Liquidity Preference Hypothesis

We provide a formal test of the liquidity preference hypothesis (LPH), that is, the monotonicity of ex ante term premiums, using nonparametric estimates that do not require a structural model for conditional expected returns. Although the point estimates of the term premiums are consistent with previous conclusions in the literature regarding violations of the LPH, the test statistics are generally insignificant, even when powerful conditioning information is used. These results illustrate the importance of correctly accounting for correlations across maturities and of formally testing the inequality restrictions implied by the LPH.     

Factor pricing in commodity futures and the role of liquidity

This paper empirically investigates the pricing factors and their associated risk premiums of commodity futures. Existing pricing factors in equity and bond markets, including market premium and term structure, are tested in commodity futures markets. Hedging pressure in commodity futures markets and momentum effects is also considered. This study combines these factors to discuss their importance in explaining commodity future returns, while the literature has studied these factors separately. One of the important pricing factors in equity and bond markets is liquidity, but its role as a pricing factor in commodity futures markets has not yet been studied. To our knowledge, this research is the first to study liquidity as a pricing factor in commodity futures. The risk premiums of two momentum factors and speculators’ hedging pressure range from 2% to 3% per month and are greater than the risk premiums of roll yield (0.8%) and liquidity (0.5%). The result of a significant liquidity premium suggests that liquidity is priced in commodity futures.     

The financial crisis in Norway: effects on financial markets and measures taken

This article guides through the measures implemented in Norway in order to dampen negative effects stemming from the financial crisis. We also discuss some features of the Norwegian money market and the liquidity system in Norway. From the point of view of central banks, the widening gap between money market rates and the key policy rate has been one disturbing element of the financial crises. We develop a simple model, which illustrates how developments in forward exchange premiums can provide insight as to why money market premiums differ across currencies. The model shows that the excess supply of term liquidity in dollar relative to the excess supply of term liquidity in other currencies has an impact on the domestic money market premium relative to that on USD.