An Estimate Of The Inflation Risk Premium Using A Three Factor Affine Term Structure Model
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An Estimate Of The Inflation Risk Premium Using A Three Factor Affine Term Structure Model
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Author : J. Benson Durham
language : en
Publisher:
Release Date : 2006
An Estimate Of The Inflation Risk Premium Using A Three Factor Affine Term Structure Model written by J. Benson Durham and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with Interest rates categories.
Using Affine Models Of The Term Structure To Estimate Risk Premia
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Author : Nikolaos Panigirtzoglou
language : en
Publisher:
Release Date : 2005
Using Affine Models Of The Term Structure To Estimate Risk Premia written by Nikolaos Panigirtzoglou and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005 with categories.
This paper uses affine models of the term structure to provide historical estimates of risk premia. The foreign exchange and inflation risk premia can be modelled in the same way since the price level can be thought of as an exchange rate that transforms real prices to nominal prices. Affine models with three latent factors of the Cox, Ingersoll and Ross (1985) type are used, with a common factor between the two pricing kernels (state price vectors) to account for interdependence. In the case of foreign exchange risk premium two factors are used to model the domestic pricing kernel and two factors to model the foreign pricing kernel with a common factor between them. This specification can account for the forward premium anomaly, the tendency for high interest rate currencies to appreciate, which contradicts uncovered interest rate parity. In the case of inflation risk premium two factors are used to model the real pricing kernel and two factors to model the nominal pricing kernel with a common factor between them. The model distinguishes between expected and realised variables and therefore allows the estimation of expectational errors. The model also allows for time-varying market prices of risk and time-varying correlations between the two pricing kernels or between each of the pricing kernels and the foreign exchange rate or the price level. Another contribution, which has been ignored in the previous literature, is that the model is estimated using both bond yields and realised price level or foreign exchange rate changes. Fitting the later is necessary for the model to produce realistic patterns for the price level or foreign exchange rate changes. The results show that the foreign exchange risk premium fell substantially after 96, which is consistent with the large appreciation of sterling. Expectational errors were very large for the whole of the period studied, that is, from 93 to 99. Inflation risk premium was about 100 basis points for most of the period 87 to 97, but fell substantially since Bank independence in March 97, which may be the result of a higher credibility to the new UK monetary policy institutional framework. Inflation expectational errors also became smaller after the adoption of inflation targeting in UK in January 93.
Estimation Of The Inflation Risk Premium
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Author : Pavol Povala
language : en
Publisher:
Release Date : 2007
Estimation Of The Inflation Risk Premium written by Pavol Povala and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2007 with categories.
This master's thesis analyzes the inflation risk premium embodied in the nominal interest rates based on UK government index-linked and nominal securities data in a period of high and volatile inflation, 1985 to 1992, and in a period of low and stable inflation, 1997 to 2007. To recover the inflation risk premium a discrete time term structure model is estimated, using jointly real and nominal yields. Inflation is modeled as an observable factor uncorrelated with latent factors in an affine Gaussian framework. Subsequently, the dynamics of the inflation risk premium and its driving factors are studied in both periods. In the first period, I find the inflation risk premium to be significant most of the time, strongly time-varying and occasionally negative, in the second period the inflation risk premium is only significant at a few points and significantly lower. The variance decomposition of the nominal-to-real yield spread shows that movements in spreads are mostly driven by changes in the inflation risk premium, especially at the long end of the curve.
Affine Term Structure Models For The Foreign Exchange Risk Premium
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Author : Luca Benati
language : en
Publisher:
Release Date : 2006
Affine Term Structure Models For The Foreign Exchange Risk Premium written by Luca Benati and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2006 with categories.
This paper uses two affine term structure models from the Duffie-Kan class - a three-factor Cox-Ingersoll-Ross model, and a three-factor model in the spirit of Longstaff and Schwartz - to extract historical estimates of foreign exchange risk premia for the pound with respect to the US dollar. The term structures of interest rates for the two countries are estimated jointly, together with the dynamics of the nominal exchange rates between them, via maximum likelihood. The likelihood function is computed via the Kalman filter, and is maximised numerically with respect to unknown parameters. Particular attention is paid to the robustness of the results across models; to the overall (filter plus parameter) econometric uncertainty associated with risk premia estimates; and to the ability of estimated structures to replicate Fama's quot;forward discount anomaly.quot; The paper's main results may be summarised as follows. First, risk premia estimates are not consistent across the two models. Second, both models fail to replicate the forward discount anomaly, with theoretical values of amp;β in the Fama regressions implied by estimated structures being consistently positive at all horizons from 1 to 12 months.
The Inflation Risk Premium
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Author : Alexander de Roode
language : en
Publisher:
Release Date : 2014
The Inflation Risk Premium written by Alexander de Roode and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
This paper examines the inflation risk premium in affine term structure models. By estimating empirical distributions for the inflation risk premium using a new Bayesian methodology, we find a wide range of likely estimates. The 95% credibility intervals for 5 year maturity range from about -95 to 88 basis points in the UK and -4 to 119 basis points in the US during the period of 2004-2012. Our results show that affine term structure models are unable to capture the inflation risk premium accurately. To that end, we use a Bayesian methodology to show how the financial crisis in 2008 impacts the uncertainty regarding inflation risk premium. We find a substantial upward shift in the inflation risk premium in the UK while an downward shift in the US. In particular, our 95% credibility intervals shift to -105 to 150 in the UK and -50 to 92 basis points in the US.
Global Factors In The Term Structure Of Interest Rates
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Author : Mirko Abbritti
language : en
Publisher: International Monetary Fund
Release Date : 2013-11-05
Global Factors In The Term Structure Of Interest Rates written by Mirko Abbritti and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-11-05 with Business & Economics categories.
This paper introduces global factors within a FAVAR framework in an empirical affine term structure model. We apply our method to a panel of international yield curves and show that global factors account for more than 80 percent of term premia in advanced economies. In particular they tend to explain long-term dynamics in yield curves, as opposed to domestic factors which are instead more relevant to short-run movements. We uncover the key role for global curvature in shaping term premia dynamics. We show that this novel factor precedes global economic and financial instability. In particular, it coincides with immediate expectations of permanent expansionary monetary policy during the recent crisis.
Contemporary Topics In Finance
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Author : Iris Claus
language : en
Publisher: John Wiley & Sons
Release Date : 2019-04-29
Contemporary Topics In Finance written by Iris Claus and has been published by John Wiley & Sons this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019-04-29 with Business & Economics categories.
The literature surveys presented in this edited volume provide readers with up-to-date reviews on eleven contemporary topics in finance. Topics include unconventional monetary policy, implicit bank guarantees, and financial fraud - all linked to the exceptional event of the Global Financial Crisis Explores how recent studies on inflation risk premia and finance and productivity have benefitted from new empirical methods and the availability of relevant data Demonstrates how angel investing, venture capital, relationship lending and microfinance have benefitted from increased research as they have become more seasoned Investigates crowdfunding and crypto-currencies which have both arisen from recent technological developments
Yield Curve Modeling And Forecasting
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Author : Francis X. Diebold
language : en
Publisher: Princeton University Press
Release Date : 2013-01-15
Yield Curve Modeling And Forecasting written by Francis X. Diebold and has been published by Princeton University Press this book supported file pdf, txt, epub, kindle and other format this book has been release on 2013-01-15 with Business & Economics categories.
Understanding the dynamic evolution of the yield curve is critical to many financial tasks, including pricing financial assets and their derivatives, managing financial risk, allocating portfolios, structuring fiscal debt, conducting monetary policy, and valuing capital goods. Unfortunately, most yield curve models tend to be theoretically rigorous but empirically disappointing, or empirically successful but theoretically lacking. In this book, Francis Diebold and Glenn Rudebusch propose two extensions of the classic yield curve model of Nelson and Siegel that are both theoretically rigorous and empirically successful. The first extension is the dynamic Nelson-Siegel model (DNS), while the second takes this dynamic version and makes it arbitrage-free (AFNS). Diebold and Rudebusch show how these two models are just slightly different implementations of a single unified approach to dynamic yield curve modeling and forecasting. They emphasize both descriptive and efficient-markets aspects, they pay special attention to the links between the yield curve and macroeconomic fundamentals, and they show why DNS and AFNS are likely to remain of lasting appeal even as alternative arbitrage-free models are developed. Based on the Econometric and Tinbergen Institutes Lectures, Yield Curve Modeling and Forecasting contains essential tools with enhanced utility for academics, central banks, governments, and industry.
The Yield Curve And Financial Risk Premia
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Author : Felix Geiger
language : en
Publisher: Springer Science & Business Media
Release Date : 2011-08-17
The Yield Curve And Financial Risk Premia written by Felix Geiger and has been published by Springer Science & Business Media this book supported file pdf, txt, epub, kindle and other format this book has been release on 2011-08-17 with Business & Economics categories.
The determinants of yield curve dynamics have been thoroughly discussed in finance models. However, little can be said about the macroeconomic factors behind the movements of short- and long-term interest rates as well as the risk compensation demanded by financial investors. By taking on a macro-finance perspective, the book’s approach explicitly acknowledges the close feedback between monetary policy, the macroeconomy and financial conditions. Both theoretical and empirical models are applied in order to get a profound understanding of the interlinkages between economic activity, the conduct of monetary policy and the underlying macroeconomic factors of bond price movements. Moreover, the book identifies a broad risk-taking channel of monetary transmission which allows a reassessment of the role of financial constraints; it enables policy makers to develop new guidelines for monetary policy and for financial supervision of how to cope with evolving financial imbalances.
A Macroeconomic Approach To The Term Premium
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Author : Emanuel Kopp
language : en
Publisher: International Monetary Fund
Release Date : 2018-06-15
A Macroeconomic Approach To The Term Premium written by Emanuel Kopp and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018-06-15 with Business & Economics categories.
In recent years, term premia have been very low and sometimes even negative. Now, with the United States economy growing above potential, inflationary pressures are on the rise. Term premia are very sensitive to the expected future path of growth, inflation, and monetary policy, and an inflation surprise could require monetary policy to tighten faster than anticipated, inducing to a sudden decompression of term and other risk premia, thus tightening financial conditions. This paper proposes a semi-structural dynamic term structure model augmented with macroeconomic factors to include cyclical dynamics with a focus on medium- to long-run forecasts. Our results clearly show that a macroeconomic approach is warranted: While term premium estimates are in line with those from other studies, we provide (i) plausible, stable estimates of expected long-term interest rates and (ii) forecasts of short- and long-term interest rates as well as cyclical macroeconomic variables that are stunningly close to those generated from large-scale macroeconomic models.