Options on interest rates and on interest-sensitive instruments

The integration of emerging economies with developed economies has changed the behaviour of interest rates and exchange rate fluctuation. The current study tries to analyse the implication of expectation hypothesis (EH) and term structures of interest rates between India and US. Using vector auto regressive estimates, the study tries to test the dynamic interdependence of interest rates on exchange rate fluctuation. Further, the study estimates Granger causality tests and Impulse Response Functions to test the behaviour of interest rate movements for a period of nineteen years ranging from June 1996 to June 2015.The empirical results of the study show evidence in line with the existence of EH in the case of emerging market. Nevertheless, in the case of advanced economies we do not find any evidence for EH. The findings revealed that the spread between long and short rate of India is influenced by short-term interest rates and past values of Indian spread. This implies that the fluctuations in the long rate over the short rate evidenced the strong presence of EH as far as emerging economy is concerned.To the best of our knowledge, this is the first study in Indian market, which tests the role of EH in interest rate fluctuations along with exchange rate. Since majority of the studies on term structure of interest rates focus on developed markets, the present study is an attempt to test the causal relationship between developed and developing economies.

At present, China is in the critical stage of transforming from a quantitative monetary policy to a price-based monetary policy. The implementation of a quantitative-price mixed monetary policy can further improve the effect of monetary policy and interest rate regulation and maintain the stable operation of the macro economy. Based on the current economic situation, this article conducts experiments to prove the relationship between its monetary policy and the term structure of interest rates. To this end, this article first analyzes and compares the final effects of monetary policy on regional economies with the aid of an analysis framework that can simultaneously take into account the individuality of regional economies, the spillover effects between regional economies and the overall nature of monetary policy. Then, this article further combines the current background of interest rate marketization and monetary policy from quantity-oriented price-oriented changes. Focusing on the interest rate channel, it deeply analyzes the regional effects and formation of China's monetary policy under the new situation. First of all, on the basis of combing and summarizing relevant literature, find the expansion space for evaluating the regional effect of China's monetary policy. Experimental research results show that the term structure of interest rates is playing an increasingly important role in monetary policy. Combining the study of the term structure of interest rates with monetary policy and examining the relationship between them can not only promote the role of interest rates in macro-control, but also have important implications for improving the forward-looking and effectiveness of monetary policy.

Term Structure of Interest Rates. Review of a Theory of the Term Structure of Interest Rates (CIR)

This paper shows the limitation of the cost-of-carry model which is used for pricing the theoretical value of the KTB futures, and proposes an alternative pricing model based on the term structure of interest rates. Under the assumption of 1-factor term structure, this paper treats the theoretical price of KTB futures price as a risk-neutral expectation of payoff function at maturity and derives the approximated formula for pricing the KTB futures. As compared with our price of KTB futures using the term structure of interest rates, the conventional KOFEX price based on the cost-of-carry model tends to be overvalued as the time to maturity increases. This result is due to the difference between the futures and forward prices which is caused by treating the futures contract as the forward contract in the conventional KOFEX pricing model. In particular, this discrepancy becomes more significant when the price of underlying asset and the interest rates are negatively correlated and the time to maturity is longer. The bond futures contract is a typical example of financial instrument whose price has a negative correlation with interest rates

Government Bonds and the Term Structure of Interest Rates

With regard to asset liability management (ALM), the future evolution of the interest rate market plays a major role. This is natural, as with a deterministic evolution of the interest rate (in fact, only in a deterministic setting we could speak of the interest rate!), interest rate risk would not play a role in ALM. However, as the main objective of ALM is to relate payments occurring at dif-ferent times in a suitable way, especially when the time horizon is large, assum-ing a deterministic interest rate evolution is absolutely inappropriate. Thus, finding a good model for the evolution of the term structure of interest rates is one of the main obstacles to overcome for successful ALM.

This paper mainly discusses the pricing of credit default swap (CDS) in the fractional dimension environment. We assume that the default intensity of a firm depends on the default states of counterparty firms and the term structure of interest rates, but the contagious impact of the counterparty firm is decreasing over time, until disappears. The interest rate risk is reflected by the fractional Vasicek interest rate model. We model the firm’s default intensity in the looping default framework and derive the pricing formulas of risky bonds and credit default swap.

The Cap Market, the Term Structure and the Unspanned Factors: Taking Care of Non-Linearity

This paper examines the implications of the expectations theory of the term structure of interest rates for the implementation of inflation targeting. We show that the responsiveness of the central bank’s instrument to the underlying state of the economy is increasing in the duration of the long-term bond. On the other hand, an increase in duration will make long-term inflationary expectations - and therefore also the long-term nominal interest rate - less responsive to the state of the economy. The extent to which the central bank is concerned with output stabilisation will exert a moderating influence on the central bank’s response to leading indicators of future inflation. However, the effect of an increase in this parameter on the long-term nominal interest rate turns out to be ambiguous. Next, we show that both the sensitivity of the nominal term spread to economic fundamentals and the extent to which the spread predicts future output, are increasing in the duration of the long bond and the degree of structural output persistence. However, if the central bank becomes relatively less concerned about inflation stabilisation the term spread will be less successful in predicting real economic activity.

The influence of market segmentation on the term structure of interest rates has received considerable attention in recent years. However, an event gone unnoticed in this attention is relaxation in the authority of the Treasury to issue long-term bonds apart from the 41/4 percent interest rate ceiling imposed by Congress. This paper tests the effect of 1971 and 1976 changes in this authority which, in turn, affected the expected supply of long-term relative to short-term securities. In this regard, several widely used expectation models are employed, and new insights are gained into the importance of market segmentation on the term structure of interest rates. The first section of the paper reviews the market segmentation theory while the second investigates the origin, purpose and impact of the 4/4 percent interest rate ceiling. The next section presents the expectations models to be tested, followed by a discussion of the data used. The results of the empirical tests are analyzed in the next section, and implications drawn with respect to the market segmentation theory. Concluding remarks appear in the last section.

The aim of this paper is twofold; first we concentrate on the work of Vasicek (1977) and Cox, Ingersoll and Ross (1985). We examine and test empirically each model and discuss its performance in predicting the term structure of interest rates using a parametric estimating approach GMM (Generalized Moments Method). Second we estimate the term structure of interest rate dynamics using a nonparametric approach ANN (Artificial Neural Network). Two neural network models are performed. The first model uses spreads between interest rates of 10 different maturities as the only explanatory variable of interest rate changes. The second model introduces two factors, spreads and interest rates' levels. Using historical U.S. Treasury bill rates and Treasury bond yields, we compare the ability of each model to predict the term structure of interest rates. Data are daily and cover the period from 3 January 1995 to 29 December 2000. Results suggest that neural network, Vasicek (1977) and Cox, Ingersoll and Ross (1985) models generate different yield curves. Neural network models outperform the parametric standard models. The most successful forecast is obtained with a two factors neural network model.

This article studies the information content of the term structure of interest rates of Thai government bonds. Using monthly data from July 2001 to December 2013, this article tests whether the term structure contains information about future interest rates, inflation and gross domestic product (GDP) growth. The results suggest that, despite the low liquidity of the Thai government bond market, the term structure contains considerable information about future interest rates and GDP growth. JEL Classification: E43, E44, G12

This study examines the significance of risk modelling and asymmetries when researchers test the popular economic theories concerning the term structure of interest rates. A panel data set of returns on government bond portfolios was used and methods to account for related movements in risk premia across assets with different currency denomination were employed. Rather than attempting to model risk directly in terms of observables, the study has instead exploited an implication of the CAPM concerning how risk premia for a given maturity structure would vary through time in a related manner across different type of assets. In light of recent non-linear research in the area of term structure of interest rates the hypothesis is investigated that the spread effect might have a non-linear impact on excess holding period yield (EHPY). Non-linear effects of spread on EHPY were found in all the maturity structure exception being the short-term maturities. There was evidence for a mean reversion process of returns...

The term structure of interest rates (TS) is an important analytical device in monetary economics. The central bank controls short-term rates, but decisions to invest rather depend on the long-term rate. Thus the TS appears central to the transmission process of monetary policy. The expectations theory of the TS states that the slope of the yield curve, the empirical approximation of the TS, “has something to do with expectations about future interest rates” (Shiller 1990, p. 644). If this were true, the TS could be a reliable indicator for the credibility and the effect of monetary policy decisions (cf. Gebauer 1991). Unfortunately the evidence for the expectations theory is, at best, mixed. In the following sections I will analyse the information contained in the ‘official’ German TS, published monthly by the Deutsche Bundesbank (Statistische Beihefte, Reihe 2, Wertpapierstatistik, table 8d), with respect to the expectations theory.

In modern conditions of the rapid industrial development the banks have to forecast their risks and profitability precisely, to apply information technologies to assess their activities. To evaluate the bank's income, it is necessary to carry out an internal analysis of its assets and liabilities and determine the factors effecting the bank's profitability by managing interest rate risk. The hypothesis of the study is the analysis of the impact on the net interest income and interest rate risk of a commercial bank of factors such as the exchange rate and the key rate of the Bank of Russia (for example, Sberbank, PJSC). There has been studied the impact of the factors (exchange rate and key interest rate of Central Bank of Russia) on the bank's net interest income by using correlation and regression analysis and building a regression model. Many tools are found to be used by the experienced analysts. One of the main tools is GAP analysis of interest rate risk. There have been illustrated the graphs of changes in interest rates of savings and loan associations during the crisis in the United States in the 1950-1960, of realization of interest rate risk with an increase in interest rates, the distribution of assets and liabilities according to the maturity of the balance sheet structure, the impact of changes in the interest rate GAP on net interest income, etc. A matrix of correlations of all variables in the sample (rates of growing values) was constructed. Conclusions are drawn on the need to use hedging instruments (interest rate swaps, interest rate options), as well as of attracting the most reliable data on the state of interest rate risk in the commercial banks.