Yield Curve Smoothing Models of the Term Structure

Estimation of benchmark yield curve in developing markets is often influenced by liquidity concentration. Based on an affine term structure model, we develop a long run liquidity weighted fitting method to address the trading concentration phenomenon arising from horizon-induced clientele equilibrium as well as information discovery. Specifically, we employ arguments from models of liquidity concentration and benchmark security information. After examining time series behavior of price errors against our fitted model, we find results consistent with both the horizon and information hypotheses. Our evidence indicates that trading liquidity carries information effect in the long run, which cannot be fully captured in the short run. Trading liquidity plays a key role in long run term structure fitting. Markets for liquid benchmark government bond issues collectively form a long term equilibrium. Compared with previous studies, our results provide a robust and realistic characterization of the spot rate term structure and related price forecasting over time, which in turn help portfolio investment of fixed income and long run pricing of financial instruments.

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Yield curve dynamics with macroeconomic factors in Iberian economies

Global Journal of Business Economics and Management Current Issues ◽

10.18844/gjbem.v10i3.4691 ◽

2020 ◽

Vol 10 (3) ◽

pp. 193-203

Author(s):

Isabel Maldonado ◽

Carlos Pinho

Keyword(s):

Interest Rates ◽

Term Structure ◽

Yield Curve ◽

Error Variance ◽

Impact Factors ◽

Strong Impact ◽

Impulse Response Functions ◽

Macroeconomic Factors ◽

Vector Autoregressive ◽

Future Evolution

Abstract The aim of this paper is to analyse the bidirectional relation between the term structure of interest rates components and macroeconomic factors. Using a factor augmented vector autoregressive model, impulse response functions and forecasting error variance decompositions we find evidence of a bidirectional relation between yield curve factors and the macroeconomic factors, with increased relevance of yield factors over it with increased forecasting horizons. The study was conduct for the two Iberian countries using information of public debt interest rates of Spain and Portugal and macroeconomic factors extracted from a set of macroeconomic variables, including indicators of activity, prices and confidence. Results show that the inclusion of confidence and macroeconomic factors in the analysis of the relationship between macroeconomics and interest rate structure is extremely relevant. The results obtained allow us to conclude that there is a strong impact of changes in macroeconomic factors on the term structure of interest rates, as well as a significant impact factors of the term structure in the future evolution of macroeconomic factors.

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Biased Decision-Making and Liquidity Buffer in Commercial Banking

Applied Economics and Finance ◽

10.11114/aef.v5i2.2784 ◽

2018 ◽

Vol 5 (2) ◽

pp. 84

Author(s):

Mingyuan Sun

Keyword(s):

Term Structure ◽

Reference Point ◽

Yield Curve ◽

Risk Preference ◽

Framing Effect ◽

Portfolio Allocation ◽

Commercial Banking ◽

Bank Run ◽

Liquidation Cost

Few derived versions based on the classic bank run model have taken into account the framing effect of general lenders. The purpose of this study is to revisit the issue and discuss a model of bank run equilibrium combined with biased risk preference, which is applied to analyze how portfolio allocation and liquidity buffer in commercial banks are affected by liquidation cost and the reference point. The results suggest the condition on which the liquidity buffer of a particular bank should provide. Liquidation cost is positively correlated with the lower bound of liquidity buffer. The effect of the reference point on liquidity buffer partially depends on the slope of yield curve term structure. Higher reference point could typically cause a lower portion of long-term investment.

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Does the slope of the yield curve of the interbank market influence prices on the Warsaw Stock Exchange? A sectoral perspective

Przegląd Statystyczny ◽

10.5604/01.3001.0014.8494 ◽

2021 ◽

Vol 67 (4) ◽

pp. 294-307

Author(s):

Ewa Majerowska ◽

Jacek Bednarz

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Yield Curve ◽

Stock Exchange ◽

Rate Curve ◽

Daily Data ◽

Warsaw Stock Exchange ◽

The Interest Rate ◽

Relationship Of

The interest rate curve is often viewed as the leading indicator of economic prosperity in a broad sense. This paper studies the ability of the slope of the yield curve in the term structure of interest rates to impact the sectoral indices on the Warsaw Stock Exchange, using daily data covering the period from 1 January 2001 to 30 September 2020. The results of the research indicate an ambiguous dependence of the logarithmic rates of return of sub-indices on the change of the interbank interest rate curve. The only sectors showing a clear relationship of this type is energy and pharmaceuticals.

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Yield Curves, Swap Curves, and Term Structure of Interest Rates

Debt Markets and Investments ◽

10.1093/oso/9780190877439.003.0012 ◽

2019 ◽

pp. 203-228

Author(s):

Tom P. Davis ◽

Dmitri Mossessian

Keyword(s):

Interest Rate ◽

Interest Rates ◽

Term Structure ◽

Yield Curve ◽

Yield Curves ◽

No Arbitrage ◽

Interest Rate Swap ◽

The Interest Rate ◽

Rate Swap ◽

The U.S

This chapter discusses multiple definitions of the yield curve and provides a conceptual understanding on the construction of yield curves for several markets. It reviews several definitions of the yield curve and examines the basic principles of the arbitrage-free pricing as they apply to yield curve construction. The chapter also reviews cases in which the no-arbitrage assumption is dropped from the yield curve, and then moves to specifics of the arbitrage-free curve construction for bond and swap markets. The concepts of equilibrium and market curves are introduced. The details of construction of both types of the curve are illustrated with examples from the U.S. Treasury market and the U.S. interest rate swap market. The chapter concludes by examining the major changes to the swap curve construction process caused by the financial crisis of 2007–2008 that made a profound impact on the interest rate swap markets.

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Covered interest parity in cross-currency swap bases and demand for US treasuries

International Journal of Financial Engineering ◽

10.1142/s2424786320500188 ◽

2020 ◽

Vol 07 (02) ◽

pp. 2050018

Author(s):

Cho-Hoi Hui ◽

Chi-Fai Lo ◽

Chin-To Fung

Keyword(s):

Term Structure ◽

Global Financial Crisis ◽

Yield Curve ◽

Balance Sheet ◽

Term Structure Model ◽

Dynamic Relationship ◽

The Us ◽

Covered Interest Parity ◽

Interest Parity ◽

Us Dollar

This paper studies the dynamic relationship between demand for the US Treasury yields and cross-currency swap (CCS) bases since the 2008 global financial crisis. Using a three-factor non-Gaussian-term structure model for the US Treasuries, an estimated short-rate premium in the yield curve tends to move in tandem with and lead the euro and Japanese yen CCS bases against the US dollar. The dynamics between the premium and CCS bases are found to be co-integrated, suggesting a long-run equilibrium between them. Empirically, the premium is found to be positively related to demand for Treasuries. This is consistent with recent studies in which factors including the strength of the US dollar, the demand for dollar funding and banks’ balance-sheet structures play important roles in determining the CCS bases. These factors increase demand for US Treasuries (high-quality US dollar assets) by investors searching for safe dollar assets and banks with higher leverages due to increased demand for dollar funding. The findings in this paper contribute to explaining the widespread failure of covered interest parity in foreign exchange swap markets.

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A Nonparametric Approach to Bond Portfolio Immunization

Mathematics ◽

10.3390/math7111121 ◽

2019 ◽

Vol 7 (11) ◽

pp. 1121

Author(s):

Victor Lapshin

Keyword(s):

Interest Rates ◽

Term Structure ◽

Best Practice ◽

Yield Curve ◽

Model Parameters ◽

Dimensional Manifold ◽

Nonparametric Approach ◽

Hedging Portfolio ◽

Practice Approach ◽

Low Dimensional

We consider the problem of short term immunization of a bond-like obligation with respect to changes in interest rates using a portfolio of bonds. In the case that the zero-coupon yield curve belongs to a fixed low-dimensional manifold, the problem is widely known as parametric immunization. Parametric immunization seeks to make the sensitivities of the hedged portfolio price with respect to all model parameters equal to zero. However, within a popular approach of nonparametric (smoothing spline) term structure estimation, parametric hedging is not applicable right away. We present a nonparametric approach to hedging a bond-like obligation allowing for a general form of the term structure estimator with possible smoothing. We show that our approach yields the standard duration based immunization in the limit when the amount of smoothing goes to infinity. We also recover the industry best practice approach of hedging based on key rate durations as another particular case. The hedging portfolio is straightforward to calculate using only basic linear algebra operations.

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