New Economics Papers
on Financial Markets
Issue of 2009‒01‒03
five papers chosen by

  1. Evaluating asset pricing models in a Fama-French framework By Carlos Enrique Carrasco Gutierrez; Wagner Piazza Gaglianone
  2. Volatility Spillovers and Contagion from Mature to Emerging Stock Markets By John Beirne; Guglielmo Maria Caporale; Marianne Schulze-Ghattas; Nicola Spagnolo
  3. The term structure of interest rates across frequencies By Katrin Assenmacher-Wesche; Stefan Gerlach
  4. A no-arbitrage structural vector autoregressive model of the UK yield curve By Kaminska, Iryna
  5. A Term Structure Decomposition of the Australian Yield Curve By Richard Finlay; Mark Chambers

  1. By: Carlos Enrique Carrasco Gutierrez; Wagner Piazza Gaglianone
    Abstract: In this work we propose a methodology to compare different stochastic discount factor (SDF) proxies based on relevant market information. The starting point is the work of Fama and French, which evidenced that the asset returns of the U.S. economy could be explained by relative factors linked to characteristics of the firms. In this sense, we construct a Monte Carlo simulation to generate a set of returns perfectly compatible with the Fama and French factors and, then, investigate the performance of different SDF proxies. Some goodness-of-fit statistics and the Hansen and Jagannathan distance are used to compare asset pricing models. An empirical application of our setup is also provided.
    Date: 2008–12
  2. By: John Beirne; Guglielmo Maria Caporale; Marianne Schulze-Ghattas; Nicola Spagnolo
    Abstract: This paper examines volatility spillovers from mature to emerging stock markets and tests for changes in the transmission mechanism-contagion-during turbulences in mature markets. Tri-variate GARCH-BEKK models of returns in global (mature), regional, and local markets are estimated for 41 emerging market economies (EMEs), with a dummy capturing parameter shifts during turbulent episodes. LR tests suggest that mature markets influence conditional variances in many emerging markets. Moreover, spillover parameters change during turbulent episodes. Conditional variances in most EMEs rise during these episodes, but there is only limited evidence of shifts in conditional correlations between mature and emerging markets.
    Keywords: Spillovers , Stock markets , Developed countries , Emerging markets , Economic models ,
    Date: 2008–12–10
  3. By: Katrin Assenmacher-Wesche (Schweizerische Nationalbank, Börsenstrasse 15, Postfach 2800, 8022 Zürich, Switzerland.); Stefan Gerlach (Johann Wolfgang Goethe Universität, Mertonstrasse 17, D-60325 Frankfurt am Main.)
    Abstract: This paper tests the expectations hypothesis (EH) of the term structure of interest rates in US data, using spectral regression techniques that allow us to consider different frequency bands. We find a positive relation between the term spread and the change in the long-term interest rate in a frequency band of 6 months to 4 years, whereas the relation is negative at higher and lower frequencies. We confirm that the variance of term premia relative to expected changes in long-term interest rates dominates at high and low frequencies, leading the EH to be rejected in those bands but not in the intermediate frequency band. JEL Classification: C22, E43.
    Keywords: Expectations theory of the term structure, interest rates, spectral egression, frequency domain.
    Date: 2008–12
  4. By: Kaminska, Iryna (Bank of England)
    Abstract: This paper combines a structural vector autoregression (SVAR) with a no-arbitrage approach to build a multifactor affine term structure model (ATSM). The resulting no-arbitrage structural vector autoregressive (NA-SVAR) model implies that expected excess returns are driven by the structural macroeconomic shocks. This is in contrast to a standard ATSM, in which agents are concerned with non-structural risks. As a simple application of a NA-SVAR model, we study the effects of supply, demand and monetary policy shocks on the UK yield curve. We show that all shocks affect the slope of the yield curve, with demand and supply shocks accounting for a large part of the time variation in bond yields. The short end of the yield curve is driven mainly by the expectations component, while the term premium matters for the dynamics of the long end of the yield curve.
    Keywords: Structural vector autoregression; interest rate risk; essentially affine term structure model
    JEL: C32 E43 E44
    Date: 2008–12–22
  5. By: Richard Finlay (Reserve Bank of Australia); Mark Chambers (Reserve Bank of Australia)
    Abstract: We use data on coupon-bearing Australian Government bonds and overnight indexed swap (OIS) rates to estimate risk-free zero-coupon yield and forward curves for Australia from 1992 to 2007. These curves, and analysts’ forecasts of future interest rates, are then used to fit an affine term structure model to Australian interest rates, with the aim of decomposing forward rates into expected future overnight cash rates plus term premia. The expected future short rates derived from the model are on average unbiased, fluctuating around the average of actual observed short rates. Since the adoption of inflation targeting and the entrenchment of low and stable inflation expectations, term premia appear to have declined in levels and displayed smaller fluctuations in response to economic shocks. This suggests that the market has become less uncertain about the path of future interest rates. Towards the end of the sample period, term premia have been negative, suggesting that investors may have been willing to pay a premium for Commonwealth Government securities. Due to the complexity of the model and the difficulty of calibrating it to data, the results should not be interpreted too precisely. Nevertheless, the model does provide a potentially useful decomposition of recent changes in the expected path of interest rates and term premia.
    Keywords: expected future short rate; term premia; term structure decomposition; affine term structure model; zero-coupon yield
    JEL: C51 E43 G12
    Date: 2008–12

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