A term structure model under cyclical fluctuations in interest rates

  1. Manuel Moreno 1
  2. Alfonso Novales 2
  3. Federico Platania 3
  1. 1 Universidad de Castilla-La Mancha
    info

    Universidad de Castilla-La Mancha

    Ciudad Real, España

    ROR https://ror.org/05r78ng12

  2. 2 Universidad Complutense de Madrid
    info

    Universidad Complutense de Madrid

    Madrid, España

    ROR 02p0gd045

  3. 3 Pôle Universitaire Léonard de Vinci
    info

    Pôle Universitaire Léonard de Vinci

    La Defense, Francia

    ROR https://ror.org/02setav13

Zugehörigkeit anzeigen +
Zeitschrift:
Documentos de Trabajo (ICAE)

ISSN: 2341-2356

Datum der Publikation: 2019

Nummer: 31

Seiten: 1-33

Art: Arbeitsdokument

DIALNET GOOGLE SCHOLAR lock_openDocta Complutense editor

Andere Publikationen in: Documentos de Trabajo (ICAE)

Zusammenfassung

We propose a flexible yet tractable model of the term structure of interest rates (TSIR). Term structure models attempt to explain how interest rates depend on their maturities at a given point in time, characterizing the relationship between short-term and long-term rates. Our model can reproduce and fit a variety of TSIR shapes by capturing cyclical fluctuations of interest rates, different monetary policy reactions as witnessed pre- and post-crisis as well as the effect of the business cycle or exogenous shocks. Our modeling approach also provides a characterization of long-term fluctuations in the mean level of interest rates unveiling the effects of monetary policy interventions in interest rates. Furthermore, using daily US data, we compare the empirical ability of our model to both fit and forecast the TSIR under different economic scenarios. We show that our model improves pricing and risk management by fitting and predicting interest rates more accurately and precisely than do existing TSIR models.

Bibliographische Referenzen

  • Andersen, L.B. and V. Piterbarg (2010). Interest Rate Modeling, Atlantic Financial Press.
  • Brigo, D. and F. Mercurio (2006). Interest Rate Models – Theory and Practice, Springer-Verlag Berlin Heidelberg.
  • Cochrane, J.H. and M. Piazzesi (2005). Bond Risk Premia. American Economic Review, 95, 1, 138-160.
  • Cox, J.C., J.E. Ingersoll, and S.A. Ross (1985). A Theory of the Term Structure of Interest Rates. Econometrica, 53, 2, 385-408.
  • Diebold, F.X. and C. Li (2006). Forecasting the Term Structure of Government Bond Yields. Journal of Econometrics, 130, 337-364.
  • Diebold, F.X. and R.S. Mariano (1995). Comparing Predictive Accuracy. Journal of Business and Economic Statistics, 13: 253-63.
  • Diebold, F.X., Rudebusch, G.D., and S.B. Aruoba (2006). The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach. Journal of Econometrics, 131, 309-338.
  • Duffie, D. and R. Kan (1996). A Yield-Factor Model of Interest Rates. Mathematical Finance, 6, 4, 379-406.
  • Evans, C.L. and D. Marshall (2007). Economic Determinants of the Nominal Treasury Yield Curve. Journal of Monetary Economics, 54, 1986-2003.
  • Fama, E. and R. Bliss (1987). The Information in Long-Maturity Forward Rates. American Economic Review, 77, 680-692.
  • Filipovi´c, D. (2009). Term Structure Models – A Graduate Course, Springer-Verlag Berlin Heidelberg.
  • Gourieroux, C. and A. Monfort (2013). Linear-Price Term Structure Models. Journal of Empirical Finance, 24, 24-41.
  • Heath, D., R. Jarrow, and A. Morton (1992). Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation. Econometrica, 60, 77-105.
  • Hull, J. and A. White (1990). Pricing Interest-Rate-Derivative Securities. Review of Financial Studies, 3, 4, 573–592.
  • Hull, J. and A. White (1993). One-Factor Interest-Rate Models and the Valuation of Interest-Rate Derivative Securities. Journal of Financial and Quantitative Analysis, 28, 2, 235-254.
  • Hull, J. and A. White (1994). Branching Out. Risk, 7, 34-37.
  • James, J. and N. Webber (2001). Interest Rate Modelling: Financial Engineering, John Wiley & Sons, Ltd, England.
  • Mallick, S., M.S. Mohanty, and F. Zampolli (2017). Market Volatility, Monetary Policy and the Term Premium. BIS Working Papers No. 606, available at http://www.bis.org/publ/work606.pdf.
  • Moreno, M. and F. Platania (2015). A Cyclical Square-Root Model for the Term Structure of Interest Rates. European Journal of Operational Research, 241, 1, 109-121.
  • Moreno, M., A. Novales, and F. Platania (2016). A Term Structure Representation with Cyclical Mean Reversion. Working paper (available upon request).
  • Munk, C. (2015). Fixed Income Modelling, Oxford University Press, United Kingdom.
  • Nawalkha, S.K., N.A. Believa, and G.M. Soto (2007) Dynamic Term Structure Modeling. John Wiley & Sons, Ltd, Hoboken.
  • Nelson, C.R. and A.F. Siegel (1987). Parsimonious Modeling of Yield Curves. Journal of Business, 60, 4, 473-489.
  • Paccagnini, A. (2016). The Macroeconomic Determinants of the US Term Structure during the Great Moderation. Economic Modelling, 52, A, 216-225
  • Realdon, M. (2016). Tests of Non Linear Gaussian Term Structure Models. Journal of International Financial Markets, Institutions and Money, 44, 128-147.
  • Renne, J.P. (2016). A Tractable Interest Rate Model with Explicit Monetary Policy Rates. European Journal of Operational Research, 251, 3, 873-887.
  • Svensson, L.E.O. (1994). Estimating and Interpreting Forward Interest Rates: Sweden 1992 - 1994. IMF Working Paper 94/114
  • Tillmann, P. (2007). Inflation Regimes in the US Term Structure of Interest Rates. Economic Modelling, 24, 2, 203-223
  • Vasicek, O. (1977). An Equilibrium Characterization of the Term Structure. Journal of Financial Economics, 5, 2, 177-188.
Fuente de los datos: Dialnet