Alternative Specifications of the German Term Structure and Its' Information Content Regarding Inflation

Schich, Sebastian

doi:10.2139/ssrn.871177

“…Similar results concerning the information content of the German term structure regarding future changes in inflation rate were obtained in previous papers, namely Schich (1996), Gerlach (1995) and Mishkin (1991), using different samples and testing procedures. 29 …”

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confidence: 85%

A two-factor model of the German term structure of interest rates

Cassola

¹

,

Luís

²

2003

Applied Financial Economics

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Modelling, Frankfurt am Main, 30 March 1999, the European Economics and Financial Centre Conference, Maribor, 30 June 1999, the University of York, 4 November 1999, Universidade Católica Portuguesa, Lisbon, 14 February 2000 In this paper we show that a two-factor constant volatility model provides an adequate description of the dynamics and shape of the German term structure of interest rates from 1972 up to 1998. The model also provides reasonable estimates of the volatility and term premium curves. Following the conjecture that the two factors driving the German term structure of interest rates represent the H[-DQWH real interest rate and the expected inflation rate, the identification of one factor with expected inflation is discussed. Our estimates are obtained using a Kalman filter and a maximum likelihood procedure including in the measurement equation both the yields and their volatilities. Terms of use: Documents in EconStor may E U R O P E A N C E N T R A L B A N K W O R K I N G PA P E R S E R I E S WORKING PAPER NO. 46 A TWO-FACTOR MODEL OF THE GERMAN TERM STRUCTURE OF INTEREST RATES BY NUNO CASSOLA AND JORGE BARROS LUÍS March 2001 E U R O P E A N C E N T R A L B A N K W O R K I N G PA P E R S E R I E S * Previous versions of this paper were presented at the ESCB Workshop on Yield Curve-(/ &ODVVLILFDWLRQ FRGHV E43, G12..H\ ZRUGV expectations hypothesis; term premiums; pricing kernels; affine model One-factor models were the first step in modelling the term structure of interest rates. These models are grounded on the estimation of bond yields as functions of the short-term interest rate. Vasicek (1977) and Cox HW DO. (1985) (CIR hereafter) are the seminal papers within this literature. However, one factor models do not overcome the discrepancy between the theoretical mean yield curve implied by the time-series properties of bond yields and the observed curves that are substantially more concave than implied by the theory (see, for instance, Backus HW DO (1998)).One answer to this question has been provided by multifactor affine models, that consider bond yields as functions of several macroeconomic and financial variables, observable or latent. Affine models are easier to estimate than binomial models, 1 given that the parameters are linear in both the maturity of the assets and the number of factors. 2Most papers have focused on the U.S. term structure. The pronounced humpshape of the US yield curve and the empirical work pio...

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“…In these papers, the results were motivated by invoking the Fisher equation, which decomposes a nominal interest rate into a real rate and expected inflation, and by assuming rational expectations. Schich (1996) found comparable results for Germany, which were even stronger than in the US for some maturity combinations.…”

mentioning

confidence: 64%

Why Does the Yield Curve Predict Output and Inflation?

Estrella

¹

2005

The Economic Journal

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The slope of the yield curve has been shown empirically to be a significant predictor of inflation and real economic activity but there is no standard theory as to why the relationship exists. This article constructs an analytical rational expectations model to investigate the reasons for the empirical results. The model suggests that the relationships are not structural but are instead influenced by the monetary policy regime. However, the yield curve should have predictive power for output and inflation in most circumstances. Various implications of the theoretical model are tested and confirmed empirically. Copyright 2004 Federal Reserve Bank of New York.

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“…11 Due to the fact that the inflation rates are forward-looking, some observations are lost, and the actual sample ends between 10 The U.S. rates are estimated using the tax-adjusted, cubic spline methodology in McCulloch (1975) from 1955 to 1991 and the smoothing splines methodology (Fisher, Nychka, Zervos, 1995) thereafter. The German rates are estimated using the linear-logarithmic approach traditionally used by the Bundesbank, and described in Schich (1996). 11 The stability test results are similar when the larger data sample, starting in 1955:01 is used.…”

Section: Yield Curve and Future Inflation Rates Empirical Results Formentioning

confidence: 98%

“…They are zerocoupon rates and yields-to-maturity, respectively. 10 While strictly speaking, zero-coupon interest rate would be required according to theory, the choice between zero-coupon interest rates or yields-to-maturity does not seem to matter in practice for purposes such as ours (Schich, 1996).…”

Section: Yield Curve and Future Inflation Rates Empirical Results Formentioning

confidence: 99%

How Stable Is the Predictive Power of the Yield Curve? Evidence from Germany and the United States

Estrella

¹

,

Rodrigues

²

,

Schich

³

2001

Self Cite

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractEmpirical research over the last decade has uncovered predictive relationships between the slope of the yield curve and subsequent real activity and inflation. Some of these relationships are highly significant, but their theoretical motivations suggest that they may not be stable over time. We use recent econometric techniques for break testing to examine whether the empirical relationships are in fact stable. We consider continuous models, which predict either economic growth or inflation, and binary models, which predict either recessions or inflationary pressure. In each case, we draw on evidence from Germany and the United States. Models that predict real activity are more stable than those that predict inflation and binary models are more stable than continuous models. The model that predicts recessions is stable over our full sample period in both Germany and the United States.

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Alternative Specifications of the German Term Structure and Its' Information Content Regarding Inflation

Cited by 16 publications

References 16 publications

A two-factor model of the German term structure of interest rates

A two-factor model of the German term structure of interest rates

Why Does the Yield Curve Predict Output and Inflation?

How Stable Is the Predictive Power of the Yield Curve? Evidence from Germany and the United States

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