Regime Shifts in a Dynamic Term Structure Model of U.S. Treasury Bond Yields

This article develops and empirically implements an arbitrage-free,dynamic term structure model with "priced" factor and regime-shiftrisks. The risk factors are assumed to follow a discrete-timeGaussian process, and regime shifts are governed by a discrete-timeMarkov process with state-dependent transition probabilities.This model gives closed-form solutions for zero-coupon bondprices, an analytic representation of the likelihood functionfor bond yields, and a natural decomposition of expected excessreturns to components corresponding to regime-shift and factorrisks. Using monthly data on U.S. Treasury zero-coupon bondyields, we show a critical role of priced, state-dependent regime-shiftrisks in capturing the time variations in expected excess returns,and document notable differences in the behaviors of the factorrisk component of the expected returns across high and low volatilityregimes. Additionally, the state dependence of the regime-switchingprobabilities is shown to capture an interesting asymmetry inthe cyclical behavior of interest rates. The shapes of the termstructure of volatility of bond yield changes are also verydifferent across regimes, with the well-known hump being largelya low-volatility regime phenomenon.     

Term Structure Dynamics in Theory and Reality

This article is a critical survey of models designed for pricingfixed-income securities and their associated term structuresof market yields. Our primary focus is on the interplay betweenthe theoretical specification of dynamic term structure modelsand their empirical fit to historical changes in the shapesof yield curves. We begin by overviewing the dynamic term structuremodels that have been fit to treasury or swap yield curves andin which the risk factors follow diffusions, jump-diffusion,or have "switching regimes." Then the goodness-of-fit of thesemodels is assessed relative to their abilities to (i) matchlinear projections of changes in yields onto the slope of theyield curve; (ii) match the persistence of conditional volatilities,and the shapes of term structures of unconditional volatilities,of yields; and (iii) to reliably price caps, swaptions, andother fixed-income derivatives. For the case of defaultablesecurities we explore the relative fits to historical yieldspreads.     

Vampires to Skyhawks: Military Aircraft and Frigate Purchases by New Zealand, 1950–70

New Zealand’s relations with its main weapons suppliers, Britain and the United States of America, are analysed in this article. Until the 1960s, New Zealand’s armed services relied almost exclusively on British hardware. The Royal New Zealand Air Force and the army were converted to American equipment in the 1960s and early 1970s, but the Royal New Zealand Navy continued to purchase frigates from British yards. This article examines the interplay of financial, political, and operational considerations affecting major procurement decisions, like the acquisition of Skyhawk aircraft in the 1960s. Although the focus is policy, consideration is also given to relations between the New Zealand government and private defence contractors. New Zealand’s revealed objective was to maintain, at minimum possible cost, a force capable of taking part in joint operations with its principal allies.     

Latent variable models for time series: A frequency domain approach with an application to the permanent income hypothesis

The theory of estimation and inference in a very general class of latent variable models for time series is developed by showing that the distribution theory for the finite Fourier transform of the observable variables in latent variable models for time series is isomorphic to that for the observable variables themselves in classical latent variable models. This implies that analytic work on classical latent variable models can be adapted to latent variable models for time series, an implication which is illustrated here in the context of a general canonical form. To provide an empirical example a latent variable model for permanent income is developed, its parameters are shown to be identified, and a variety of restrictions on these parameters implied by the permanent income hypothesis are tested.     

New Zealand's economic relations with Japan in the 1950s

New Zealand's special economic relationship with Britain was brought into question during the 1950s. The subsidization of British farmers, and the dumping of foreign food surpluses in the UK, made New Zealand's traditional market seem increasingly insecure. Wellington responded by seeking supplementary outlets, and in 1958 a commercial treaty was signed between New Zealand and Japan, despite the alarm of British manufacturers. New Zealand's trade with Japan grew after 1958, although it failed to grow as quickly as trade between Australia and Japan. The Japanese were reluctant to import many animal products. This article explains the process by which Japan and New Zealand arrived at a compromise, which enabled trade to develop without seriously damaging the interests of protected groups in either country.     

Unemployment and econometric learning

We apply well-known results of the econometric learning literature to the Mortensen and Pissarides real business cycle model. Agents can always learn the unique rational expectations equilibrium (REE), for all possible well-defined sets of parameter values, by using the minimum-state-variable solution to the model and decreasing gain learning. From this perspective the assumption of rational expectations in the model could be seen as reasonable. But using a parametrisation with UK data, simulations show that the speed of convergence to the REE is slow. This type of learning dampens the cyclical response of unemployment to small structural shocks.     

THE EUROMARKETS AND THE NEW ZEALAND GOVERNMENT IN THE 1960S

The rapid development of the Euromarkets and the more gradual opening of the West German and other capital markets to external borrowers were significant events in the reglobalisation of financial markets beginning in the 1960s. Finding it increasingly difficult to borrow in the domestic British and US capital markets, the New Zealand government sought to take advantage of the Euromarkets. As well as providing an antipodean perspective on the early Euromarkets, this paper comments on developments in the City of London in the 1960s, and outlines the process by which a relatively inexperienced borrower set about building a communicating infrastructure that enabled relationships to be forged with overseas financial institutions.     

Recent Changes in British Wage Inequality: Evidence from Large Firms and Occupations

Using a linked employer–employee dataset covering large firms, we present new evidence on British wage inequality trends over the past two decades. Differences between firms in the average wages they paid did not drive these trends. Between 1996 and 2005, greater wage variance within firms accounted for 86% of the total increase in wage variance among employees. In the following decade, wage inequality between firms continued to increase, whereas overall wage dispersion decreased. Approximately all the contribution to inequality dynamics from estimated firm-specific factors, throughout the employee wage distribution, disappears after accounting for the changing occupational content of wages.