Tax Clientele Effects in the Term Structure of UK Interest Rates

This paper tests for tax clientele effects in the term structure of UK interest rates. Five empirical models of the term structure of interest rates, incorporating tax effects, are estimated with daily data covering the period 31 March, 1995 to 3 August, 1995. In May 1995, the British government announced its intention to eliminate the tax exemption on capital gains from government bonds, but subsequently in July 1995 backtracked on some of its initial proposals. This period therefore forms the basis of a crude natural experiment in the sense that it provides an opportunity to examine tax clientele effects 'before' and 'after' an event which should have levelled greatly the taxing of government bonds. The empirical analysis suggests large tax clientele effects. However, there is little evidence of tax-specific term structures of interest rates.     

Stochastic Volatility in a Macro-Finance Model of the U.S. Term Structure of Interest Rates 1961–2004

This paper generalizes the standard homoscedastic macro-finance model by allowing for stochastic volatility, using the "square root" specification of the mainstream finance literature. Empirically, this specification dominates the standard model because it is consistent with the square root volatility found in macroeconomic time series. Thus it establishes an important connection between the stochastic volatility of the mainstream finance model and macro-economic volatility of the Okun–Friedman type. This research opens the way to a richer specification of both macro-economic and term structure models, incorporating the best features of both macro-finance and mainstream finance models.     

利率期限结构理论研究综述

本文主要对利率期限结构的理论研究做综述,以20世纪70年代初和90年代末为分界线,70年代以前称为传统的利率期限结构,主要以描述性研究为主;70年代以后称为现代利率期限结构,主要以随机模型研究为主;从20世纪90年代末,开始了两极分化发展。本文分为三个部分：第一部分对20世纪70年代之前传统利率期限结构的描述性理论作了概括;第二部分是现代利率期限结构的定量模型,包括均衡模型和无套利模型;第三部分则主要介绍20世纪90年代末以来的一些最新研究进展,包括市场模型和宏观金融模型等。     

Macroeconomic Announcements and the Distribution of Price-Endings in the U.S. Treasury Market

We investigate how new information impacts quote clustering in the bond market. We find that clustering, along with quote activity, price volatility and bid-ask spreads, increases sharply in the minutes following releases of macroeconomic news. Each returns to near-normal levels within the hour. Effects are strongest for more liquid on-the-run notes and for the announcements typically associated with substantial information flow. The strong positive comovement of clustering, quote activity, price volatility, and bid-ask spreads supports the conclusion that innovations of these variables are endogenous to the arrival and incorporation of information into prices.     

A Simple Multi-Factor,Time-Dependent-Parameter Model for the Term Structure of Interest Rates

In this paper, we present a simple version of the Duffie and Kan model (1996). Our model can perfectly fit the yield curve and the volatility curve and further provide true closed form solutions to the pure discount bond price and its European contingent claims. Due to the specific factor structure in our model, the calibration exercise is easy to implement. This advantage will improve the computational efficiency in pricing American style claims.     

Learning about the Term Structure and Optimal Rules for Inflation Targeting

In this paper, we incorporate the term structure of interest rates in the New Keynesian model and analyze optimal policy under uncertainty about private sector expectations and the degree of inflation persistence. The novel result of our paper is that for large deviations of inflation from its target, the active learning policy is less activist—in the sense of responding less aggressively to the state of the economy—than a myopic policy, which ignores the learning channel. Moreover, for most initial beliefs, the incentive for active learning increases as monetary policy’s leverage over the long‐term interest rate increases.     

The Term Structure of Interest Rates: Bounded or Falling?

This short paper resolves an apparent contradiction between Feldman's (1989) and Riedel's (2000) equilibrium models of the term structure of interest rates under incomplete information. Feldman (1989) showed that in an incomplete information version of Cox, Ingersoll, and Ross (1985), where the stochastic productivity factors are unobservable, equilibrium term structures are ``interior' and bounded. Interestingly, Riedel (2000) showed that an incomplete information version of Lucas (1978), with an unobservable constant growth rate, induces a ``corner' unbounded equilibrium term structure: it decreases to negative infinity. This paper defines constant and stochastic asymptotic moments, clarifies the apparent conflict between Feldman's and Riedel's equilibria, and discusses implications. Because productivity and growth rates are not directly observable in the real world, the question we answer is of particular relevance.     

The U.S. Treasury yield curve: 1961 to the present

The discount function, which determines the value of all future nominal payments, is the most basic building block of finance and is usually inferred from the Treasury yield curve. It is therefore surprising that researchers and practitioners do not have available to them a long history of high-frequency yield curve estimates. This paper fills that void by making public the Treasury yield curve estimates of the Federal Reserve Board at a daily frequency from 1961 to the present. We use a well-known and simple smoothing method that is shown to fit the data very well. The resulting estimates can be used to compute yields or forward rates for any horizon. We hope that the data, which are posted on the website http://www.federalreserve.gov/pubs/feds/2006 and which will be updated quarterly, will provide a benchmark yield curve that will be useful to applied economists.     

On the Information in the Interest Rate Term Structure and Option Prices

We examine whether the information in cap and swaption prices is consistent with realized movements of the interest rate term structure. To extract an option-implied interest rate covariance matrix from cap and swaption prices, we use Libor market models as a modelling framework. We propose a flexible parameterization of the interest rate covariance matrix, which cannot be generated by standard low-factor term structure models. The empirical analysis, based on US data from 1995 to 1999, shows that option prices imply an interest rate covariance matrix that is significantly different from the covariance matrix estimated from interest rate data. If one uses the latter covariance matrix to price caps and swaptions, one significantly underprices these options. We discuss and analyze several explanations for our findings.     

Nominal Interest Rates and the News

This paper provides new estimates of the impact of monetary policy actions and macroeconomic news on the term structure of nominal interest rates. The key novelty is to parsimoniously capture the impact of news on all interest rates using a simple no‐arbitrage model. The different types of news are analyzed in a common framework by recognizing their heterogeneity, which allows for a systematic comparison of their effects. This approach leads to novel empirical findings. First, monetary policy causes a substantial amount of volatility in both short‐term and long‐term interest rates. Second, macroeconomic data surprises have small and mostly insignificant effects on the long end of the term structure. Third, the term‐structure response to macroeconomic news is consistent with considerable interest‐rate smoothing by the Federal Reserve. Fourth, monetary policy surprises are multidimensional while macroeconomic surprises are one‐dimensional.     

Evidence on the Extent and Potential Sources of Long Memory in U.S. Treasury Security Returns and Yields

Unlike equity returns, many fixed-income return measures appear to display long memory. We show that the extent of long memory differs strongly for gross and excess holding period returns on U.S. Treasury securities. Granger and others have argued that long memory may only reflect infrequent structural breaks. We explore the impact of structural instability on tests for long memory and find only weak indications that it lies behind the long memory in our return series. The evidence of long memory remains strong for yield and term premia series even after accounting for a series of potential underlying structural changes.     

U.S. Monetary Policy Surprises: Identification with Shifts and Rotations in the Term Structure

We develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve. The model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks. A latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks. The approach offers informational advantages over event studies. Results from the U.S. term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock, rather than differing reactions to the same policy shock.     

Estimating yield curves of the U.S. Treasury securities: An interpolation approach

Following the approach of interpolation, this paper proposes the multiple exponential decay model to fit yield curves for both the U.S. TIPS market and the conventional Treasury security market. Several estimation methods, including the unconstrained/constrained nonlinear minimization, quadratic programming, and the iterative linear least squares, are applied to estimate the unknown parameters according to different curve‐fitting purposes. Comparisons between the proposed model and the alternatives show that the multiple exponential decay successfully (1) adapts to a variety of shapes associated with yield curves, (2) (partially) keeps in line with the economic interpretations of Nelson–Siegel summarized by Diebold and Li ( 2006 ), and (3) dominates the competing models in curve‐fitting performance measured by mean fitted‐price errors over the sample period. In addition, the exact specification of a nonparametric interpolation model is pinned down by applying three statistical tools, which enable us to jointly take into account validity, optimality, and parsimoniousness of the proposed model.     

中国高额持有美国国债的风险与对策

美国国债曾是公认的最安全的投资品。2001年以来,中国持有的美国国债随外汇储备的快速增长而增加;美国国债规模也随美国"双赤字"的扩大而膨胀。美国的政治生态及美元的霸权特性使得美国的"双赤字"难于控制,美国国债的潜在风险日益显现。中国主要面临退出困难及债权资产实际价值可能大幅缩水的困扰。建议中国利用最大债主的地位制约美国以维护自身权益;同时控制外汇储备增量优化外汇储备结构以掌握风险控制的主动权。     

Expectations Hypothesis of the Term Structure of Implied Volatility: Evidence from Foreign Currency and Stock Index Options

Using a stochastic volatility option pricing model, we showthat the implied volatilities of at-the-money options are notnecessarily unbiased and that the fixed interval time-seriescan produce misleading results. Our results do not support theexpectations hypothesis: long-term volatilities rise relativeto short-term volatilities, but the increases are not matchedas predicted by the expectations hypothesis. In addition, anincrease in the current long-term volatility relative to thecurrent short-term volatility is followed by a subsequent decline.The results are similar for both foreign currency and the S&P500 stock index options.     

Official Demand for U.S. Debt: Implications for U.S. Real Rates

We estimate a structural term-structure model of U.S. real rates, where arbitrageurs accommodate demand pressures exerted by domestic and foreign official investors. Official demand affects rates by altering the aggregate price of duration risk, and thereby bond risk premiums. Although foreign central banks' demand contributed to reduce long-term real rates mainly in the years prior to the global-financial crisis, the Federal Reserve's demand lowered rates during the quantitative easing period. Overall, the two-factor model, augmented to account for changing liquidity conditions, offers a good representation of real rates during the 2001–16 period; however, we flag some caveats and possible extensions.     

Cross‐sectional Restrictions on the Spot and Forward Term Structures of Interest Rates and Panel Unit Root Tests

In this paper we examine the stationarity of all the rates comprising the USD, GBP, DM and JPY spot and forward term structures. Instead of focussing on short maturity interest rates, as most other papers do, we perform a detailed analysis of the whole range of spot and forward interest rates of the 4 main currencies. We investigate the issue of stationarity within the framework of an equilibrium interest rate model such as Vasicek (1977), that defines the cross-sectional and time series properties that interest rates of various maturities must satisfy. We show that within a one-factor interest rate model, such as Vasicek, all interest rates are restricted to exhibit the same mean reverting behaviour. This restriction allows us to apply more powerful panel unit root tests. This methodology increases considerably the number of observations available and as a result the power of the unit root tests. The higher power of these tests allows us to demonstrate that there does exist mean reversion on the spot and forward US interest rates and the forward DM and GBP interest rates.     

中国金融市场通胀预期——基于利率期限结构的量度

通胀预期量度在以通胀预期为导向的货币政策中的意义重大。本文利用卡尔曼滤波法将离散时间两因子无套利广义高斯仿射模型运用于我国银行间债券市场,第一次从中国国债收益率曲线中分解出金融市场的中长期通胀预期L。将L与居民通胀预期和经济学家通胀预期比较,发现从事前看,L优于经济学家通胀预期,稍逊于居民通胀预期;从事后看,L优于居民通胀预期,稍逊于经济学家通胀预期。综合看,L作为金融市场形成的、高频的、反映中长期通胀的预期指数,对货币政策制定具有现实的参考意义。     

Information Effects During the U. S. Subprime Crisis

We investigate the impact of the U. S. subprime crisis on the stock markets of the Asia-Pacific countries on various event dates. Using data from Hong Kong, Indonesia, Malaysia, Singapore, and Taiwan, we find that the subprime crisis negatively affects these stock markets and investor behavior, especially in Hong Kong and Taiwan. In addition, the subprime crisis generally works through more financial linkages than trade linkages. However, when the subsamples are classified according to industry, this result exists only for the banking industry, but both financial and trade linkages become important to explain the impact of the crisis on the manufacturing industry.