nep-fmk 2007-05-12 papers

on Financial Markets

Issue of 2007‒05‒12
two papers chosen by
Kwang Soo Cheong
Johns Hopkins University

The Yield Curve through Time and Across Maturities By Richard Startz; Kwok Ping Tsang
Bond Indebtedness in a Recursive Dynamic CGE Model By André Lemelin

The Yield Curve through Time and Across Maturities

By:	Richard Startz; Kwok Ping Tsang
Abstract:	We develop an unobserved component model in which the short-term interest rate is composed of a stochastic trend and a stationary cycle. Using the Nelson-Siegel model of the yield curve as inspiration, we estimate an extremely parsimonious state-space model of interest rates across time and maturity. Our stochastic process generates a three-factor model for the term structure. At the estimated parameters, trend and slope factors matter while the third factor is empirically unimportant. Our baseline model fits the yield curve well. Model generated estimates of uncertainty are positively correlated with estimated term premia. An extension of the model with regime switching identifies a high-variance regime and a low-variance regime, where the high-variance regime occurs rarely after the mid-1980s. The term premium is higher, and more so for yields of short maturities, in the high-variance regime than that in the low-variance regime. The estimation results support our model as a simple and yet reliable framework for modeling the term structure.
Date:	2007–03
URL:	http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2007-05&r=fmk

Bond Indebtedness in a Recursive Dynamic CGE Model

By:	André Lemelin
Abstract:	In this paper, we present a minimalist version of a model of bond financing and debt, imbedded in a stepwise dynamic CGE model. The proposed specification takes into account the main characteristics of bond financing. Bonds compete on the securities market with shares, so that the yield demanded by the buyers of new bond issues increases as the cumulative bond debt grows relative to the stock of outstanding shares. Restrictions are imposed on the maturity structure of bonds, so that it is possible to attain a reasonable compromise between a realistic representation of the evolution of the debt, and the demands on model memory of past variables values which impinge on the current period. In the proposed model, the borrowing government reimburses bonds that have reached maturity, and pays interest on the outstanding debt. The prices of bonds issued at diffferent periods and with different maturities are consistent with an arbitrage equilibrium. The supply of new bonds and of new shares is determined by the government's and business's borrowing needs. Security demand reflects the rational choices of portfolio managing households, following a version of the Decaluwé-Souissi model. These notions are illustrated with fictitious data in model EXTER-Debt. The full specification of the model is described, and simulation results are presented which demonstrate model properties.
Keywords:	CGE models, recursive dynamics, bond debt, financial assets
JEL:	C68 D58 G1 H63
Date:	2007
URL:	http://d.repec.org/n?u=RePEc:lvl:lacicr:0710&r=fmk

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