Interpretation of the information content of the term structure of interest rates (original) (raw)

The information in the term structure of German interest rates

The European Journal of Finance, 2002

This paper tests the Expectations Hypothesis (EH) of the term structure of interest rates using new data for Germany. The German term structure appears to forecast future short-term interest rates surprisingly well, compared with previous studies with US data, while it has lower predictive power for long-term interest rates. However, the direction suggested by the coefficient estimates is consistent with that implied by the EH, that is when the term spread widens, long rates increase. The use of instrumental variables to deal with possible measurement errors in the data significantly improves regressions for the long rates. Moreover, reestimation with proxy variables to account for the possibility of time-varying term premia confirms that the evolution of both short and long rates corresponds to the predictions of the EH and that most of the information is in the term spread. These results are important as they suggest that monetary policy in Germany could be guided by the slope of the term structure.

The Information in the Term Structure Of

1999

This paper tests the Expectations Hypothesis (EH) of the term structure of interest rates using new data for Germany. The German term structure appears to forecast future short-term interest rates surprisingly well, compared with previous studies with US data, while it has lower predictive power for longterm interest rates. However, the direction suggested by the coefficient estimates is consistent with that implied by the EH, that is when the term spread widens, long rates increase. The use of instrumental variables to deal with possible measurement errors in the data significantly improves regressions for the long rates. Moreover, reestimation with proxy variables to account for the possibility of time-varying term premia confirms that the evolution of both short and long rates corresponds to the predictions of the EH and that most of the information is in the term spread. These results are important as they suggest that monetary policy in Germany could be guided by the slope of t...

Term structure of interest rate. European financial integration

2006

In this paper we estimate, analyze and compare the term structures of interest rate in six different countries, during the period 1992-2004. We apply Nelson and Siegel model to obtain them with a weekly frequency. Four European Monetary Union countries: Spain, France, Germany and Italy are included. UK is also included as a European country, but not integrated in the Monetary Union. Finally US completes the analysis. The goal is to determine the differences in the shape of curves between these countries. Likewise, we can determinate the most usual term structure shapes that appear in every country.

Term Structure of Interest Rates. European Financial Integration

2006

In this paper we estimate, analyze and compare the term structures of interest rates in six different countries over the period 1992-2004. We apply the Nelson-Siegel model to obtain the term structures of interest rates at weekly intervals. A total of 4,038 curves are estimated and analyzed.

Three aspects of the Swiss term structure: an empirical survey

Financial Markets and Portfolio Management, 2007

The term structure is an important transmitter of, and indicator for, monetary policy. This paper studies the Swiss term structure using monthly data from 1989 to 2005. We study the impact of the new monetary policy strategy that the Swiss National Bank (SNB) adopted at the beginning of 2000 on three aspects of the term structure. First, we test the expectations hypothesis and find it confirmed at the short end of the yield curve. At the long end, time-varying term premia seem present. Second, we ask whether the yield curve contains information regarding future inflation and economic activity. We find that a steepening of the yield curve predicted an increase in economic activity in the short term before the change in policy strategy, but not thereafter. Third, we study the contemporaneous reaction of the term structure to macroeconomic conditions and conclude that the SNB's commitment to stabilizing inflation may have become more credible after the change in the monetary policy strategy.

The term structure of interest rates in the economic and monetary union

Mathematical Methods of Operations Research (ZOR), 2002

The main purpose of this article is to present a new numerical procedure that can be used to implement a variety of di¤erent interest rate models. The new approach allows to construct no-arbitrage models for the term structure, where the stochastic process driving the rates is infinitely divisible, as in the cases of pure-di¤usion and jump-di¤usion mean reverting models. The new method determines a unique fully specified hexanomial tree, consistent with risk neutral probabilities. A simple forward recursive procedure solves for the entire tree. The proposed lattice model, which generalized the Hull and White [37] single-factor model, is relatively simple, computational e‰cient and can fit any initial term structure observed in the market. Numerical experiments demonstrate how the jump-di¤usion mean reverting model is particularly suited to describe the European money market rates behavior. Interest rates controlled by the monetary authorities behave as if they are jump processes and the term structure, at short maturity, is contingent upon the levels of these o‰cial rates.

The information content of the term structure of interest rates

Applied Economics, 2006

This paper presents the results of an alternative test of the rational expectations theory of the term structure of interest rates. Other researchers have also examined the validity of the expectations hypothesis of term structure. While there is more often rejection of the expectations hypothesis, no other theory (data-consistent with the entire yield curve) provides an empirically adequate explanation of this phenomenon. The study considers postwar US pure discount (zero coupons) bond yields with various maturities, from one month to 60 months. Based on the ex post formation of rational expectations, the expectations error is quantified and the level of truth of the expectations hypothesis tested, that is, the strength of the departure of the yield curve from the expectations theory. The results suggest that a significant amount of information available at no cost to market agents is not incorporated in forming people's expectations.

An empirical analysis of the German long-term interest rate

Applied Financial Economics, 2004

This paper estimates the short run and long run influences of the main determinants of the German long-term interest rate using quarterly data for the period 1982-1999. A major reason for our focus on the German interest rate is that this rate, and hence its determinants, wil1 be dominant in explaining the developments of the long-term Eurorate in the intemational capita1 market. The specification of our interest rate equation encompasses various theories on interest formation. The short-term German interest rate and American and Japanese bond rates appear to be the most prominent determinants of the German (and hence Euro) rate but also the business cycle and the demand for capita1 play a role in explaining this interest rate.