Predictable changes in yields and forward rates

Backus, David; Foresi, Silverio; Mozumdar, Abon; Wu, Liuren

doi:10.1016/s0304-405x(00)00088-x

Cited by 91 publications

(71 citation statements)

References 34 publications

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“…Figure 2 plots the regression slopes as a function of the maturity of the forward rates. The forward-rate regression slope estimates on the U.S. interest rates are similar to those reported in Backus, Foresi, Mozumdar and Wu (2001) for the U.S. Treasury data. The slope estimates at short maturities have the largest deviation from the null value of one, but as maturity increases, the slope estimates come closer to the null value of one.…”

supporting

confidence: 69%

Design and Estimation of Multi-Currency Quadratic Models*

Leippold

2007

Review of Finance

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Abstract. To simultaneously account for the properties of interest-rate term structure and foreign exchange rates within one arbitrage-free framework, we propose a class of multicurrency quadratic models (MCQM) with an (m + n) factor structure in the pricing kernel of each economy. The m factors model the term structure of interest rates. The n factors capture the portion of the exchange rate movement that is independent of the term structure. Our modeling framework represents the first in the literature that not only explicitly allows independent currency movement, but also guarantees internal consistency across all economies without imposing any artificial constraints on the exchange rate dynamics. We estimate a series of multi-currency quadratic models using U.S. and Japanese LIBOR and swap rates and the exchange rate between the two economies. Estimation shows that independent currency factors are essential in releasing the tension between the currency movement and the term structure of interest rates.

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confidence: 69%

Design and Estimation of Multi-Currency Quadratic Models*

Leippold

2007

Review of Finance

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“…Again, the test is based on the slope of the regression between those rates. These tests have found that the slope of these regressions are, in general, negative and become more negative on n. Other authors, such as Fama & Bliss (1987), Backus et al (2001), Duffee (2002) and Cochrane & Piazzesi (2005, regress excess returns on holding n-period bonds for m < n periods over the return on holding an m-period bond over the whole period. If EH is true, then term premia should be time-invariant and the expected excess return should be constant, implying that right-hand variables should be jointly equal to zero.…”

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confidence: 99%

Nominal term structure and term premia: evidence from Chile

2016

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The downward trend exhibited in Chile's nominal term structure since 2003 has been a common pattern shared by other developed and developing economies. To understand the behavior of the nominal yield curve in Chile, we rely on an affine dynamic term structure model (DTMS) which allows to decompose the term structure into the expected short-term premium (related to the monetary policy expectation) and a term premia. We show that most of the fall of long-term interest rates as well as its dynamics are related to the term premia rather than the expected short-term interest rate. With this, we report that the term premia is driven primarily by nominal uncertainty, i.e. the uncertainty for expected inflation and the US term premia.

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“…Indeed, all of the relatively "successful" model designs within the affine framework, in terms of empirical performance, imply positive probabilities of negative interest rates. Examples include Backus, Foresi, Mozumdar, and Wu (2001), Backus, Foresi, and Telmer (2001), Dai and Singleton (2000b), Dai and Singleton (2000a), Duffee (1999), Singleton (1997), andSingleton (1999). Leippold and Wu (1999a) identify and characterize an alternative class, the quadratic class of term structure models, where bond yields and forward rates are quadratic functions of the state vector.…”

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confidence: 99%

Design and Estimation of Quadratic Term Structure Models *

Leippold

2003

Review of Finance

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We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two-factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives. JEL Classification Codes: G12, G13, E43.Keywords: quadratic model; term structure; positive interest rates; humps; expectation hypothesis; GMM; caps and floors.Term structure modeling has enjoyed rapid growth during the last decade. Among the vast number of different models, the affine class stands out as the most popular class due to its analytical tractability. Duffie and Kan (1996)'s characterization of the complete class has spurred a stream of studies on its empirical applications and model design. Examples include general econometric estimations by Chen and Scott (1993), Duffie and Singleton (1997), Singleton (2000b), andSingleton (1999), applications to the predictability of interest rates by Frachot and Lesne (1994), Roberds and Whiteman (1999), Backus, Foresi, Mozumdar, and Wu (2001), Duffee (1999), and Dai and Singleton (2000a), and currency pricing by Backus, Foresi, and Telmer (2001). While these applications claim success in one or two dimensions, inherent tension exists when one tries to apply the model to a wider range of properties.Even more troublesome, however, is a seemingly irreconcilable tension between delivering a relatively good empirical performance and excluding negative interest rates. Indeed, all of the relatively "successful" model designs within the affine framework, in terms of empirical performance, imply positive probabilities of negative interest rates. Examples include Backus, Foresi, Mozumdar, and Wu (2001), Backus, Foresi, and Telmer (2001), Dai and Singleton (2000b), Dai and Singleton (2000a), Duffee (1999), Singleton (1997), andSingleton (1999). Leippold and Wu (1999a) identify and characterize an alternative class, the quadratic class of term structure models, where bond yields and forward rates are quadratic functions of the state vector. Their property analysis indicates that the quadratic class is comparable to the affine class for analytical tractability but is more flexible for model design. In particular, positive interest rates can be guaranteed with little loss of generality or flexibility. In this paper, we consider the model design and estimation problem within the quadratic framework.Although examples of quadratic models have appeared in the literature since the late eighties, 1 empirical applications have at best been sporadic. The most systematic empirical study, and hence the most germane to our work, is by Ahn, Dittmar, and Gallant (2001).1 Early example...

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Predictable changes in yields and forward rates

Cited by 91 publications

References 34 publications

Design and Estimation of Multi-Currency Quadratic Models*

Design and Estimation of Multi-Currency Quadratic Models*

Nominal term structure and term premia: evidence from Chile

Design and Estimation of Quadratic Term Structure Models *

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