yield curve

Financial Modelling in Python

by Shayne Fletcher and Christopher Gardner  · 3 Aug 2009  · 246pp  · 16,997 words

the class environment implemented in the ppf.market.environment module. The purpose of this class is to provide access to market data objects such as yield curves, volatility surfaces, correlation surfaces, etc. Refer to section 5.3 for the details. The following code snippets illustrate how to construct a requestor and make

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exercise tests checks that the computed explanatory variables, the LIBOR and swap rates, The Hull–White Model 117 match the corresponding rates taken from the yield curve for the case when the Hull–White volatilities are all zero. def test explanatory variables(self): from ppf.math.interpolation import loglinear times = [0.0

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72–9 tenor period 72–9 tenors 67, 84–5, 101–22, 170–6 term 28–9, 103–22 term structure of interest rates see yield curves term volatility, Hull–White model 100–22 terminal T 104–22 term var 100–22 term vol 100–22 test 6–7, 9, 17–19

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival

by Charles Goodhart and Manoj Pradhan  · 8 Aug 2020  · 438pp  · 84,256 words

’re right, it would lead to yet further upwards pressures on inflation. Third, real, inflation-adjusted interest rates, particularly at the longer end of the yield curve, may rise (Chapter 6) because of the behaviour of ex-ante (expected) savings and investment. That the elderly will dissave is not controversial. Those who

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clearer sight, long rates will start rising and very likely rise above the current rate of inflation. So, one of our conclusions is that the yield curve, which is currently flattened to an unusual degree, will probably steepen sharply. So, we are, in a sense, hedging our bets, suggesting that short rates

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World War II, trends since then World Wars WTO rules X Xiaomi Xu, T. Y Yemen Yen appreciation, after Plaza Accord Yen’s dramatic appreciation Yield curve Young, benefit less from monetary expansion Z Zero Lower Bound (ZLB) ‘Zombie’ firms

The Trade Lifecycle: Behind the Scenes of the Trading Process (The Wiley Finance Series)

by Robert P. Baker  · 4 Oct 2015

are quoted for longer periods extending up to 30 years or beyond. By combining prices for these three sets of instruments, we can derive a yield curve which indicates the yield (or interest rate) against time (see Figure 24.2). 313 Data 7 6 Yield (%) 5 4 3 2 1 0 0

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5 10 15 20 Time to maturity (years) 25 30 35 FIGURE 24.2 Yield curve Surfaces Some instruments have three dimensions – two dimensions of data for any time period. In order to look at the shape of market data over

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310–13 swaps credit default 30–1, 51–2, 65–6, 175, 209 fixings 107 foreign exchange 25, 41 interest rate 23–5, 36–7 yield curves 312–13 swaptions 66 synthetic equities (index) 45 systems see also information technology amalgamation 104–5 analytics 271–2 electronic systems 92 integrated 261 legacy

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involved in trade lifecycle in 1990s 217–19 culture clashes 219 equal opportunities 219–20 office politics 220–2, 246 positive/negative aspects 222–3 yield curves 312–13 zero bonds 27, 29, 47 Index compiled by Indexing Specialists (UK) Ltd WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go

The Global Money Markets

by Frank J. Fabozzi, Steven V. Mann and Moorad Choudhry  · 14 Jul 2002

Institute. He is Editor of the Journal of Bond Trading and Management, and has published widely in the field of debt capital markets, derivatives, and yield curve analysis. vii acknowledgements The authors wish to thank Dean Joel Smith and Professor Greg Niehaus for their efforts in bringing a Bloomberg terminal to the

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of Treasury bill yields relative to other key money market rates. Finally, we will discuss one time-tested portfolio strategy using Treasury bills—riding the yield curve. T TYPES OF TREASURY BILLS Treasury bills are issued at a discount to par value, have no coupon rate, and mature at par value.

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the-run bill), or a W (when-issued bill). Panel b of Exhibit 3.9 presents the data Bloomberg used to construct these two bill yield curves. EXHIBIT 3.8 The Spread Between 3-Month LIBOR and 3-Month Treasury Bills Summary Statistics for 1987-1999 (in basis points) Year Mean

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16.0 17.9 Panel B: Six-Month Holding Period Ride Using 9-Month Ride Using 12-Month 16.1 25.2 Both of these yield curves are positively sloped. With a positively sloped Treasury bill curve, an investor receives an additional yield for extending the bill’s maturity. This additional

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profit from the tendency for yields to fall relative to this forecast as bills move towards maturity are pursuing a strategy known as “riding the yield curve.” To illustrate this strategy, suppose an investor has a 3-month holding period. Consider two potential vehicles to satisfy this maturity preference. First, buy

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a 3-month bill and hold it to maturity. Second, buy a 6-month bill, and sell it after three months. If the yield curve is upwardsloping and does not change over the next three months, the 6-month bill will earn a higher return because of the increase in

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same information for the 6-month holding period. For a 3-month holding period, the results in Exhibit 3.10 indicate that riding the yield curve using 6-month bills provides an additional 10 basis points in returns on average and outperforms a buy-and-hold strategy over 82% of the

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Marcus, and Ramanlal provide evidence which suggests that only the most risk-averse investors would reject the riding strategy categorically. Further, investors who ride the yield curve during a Federal Reserve tightening cycle will meet with disappointing results because an unexpected rise in short rates can potentially eliminate any term premium present

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6%. Grieves, Mann, Marcus, and Ramanlal examine the performance of the riding strategy during this period and find that the overall performance of riding the yield curve deteriorates considerably. TREASURY BILLS WITH SPECIAL VALUE There is a substantial body of empirical evidence that suggests that certain Treasury bills have special value in

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paper is higher than that on Treasury bill yields. Exhibit 5.7 presents a Bloomberg MMCV (money market curves) screen that plots two money market yield curves on May 31, 2001— dealer commercial paper (top top tier) and U.S. Treasury bill yields. There are three reasons for this relationship. First,

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the beginning of July (pre-crisis) to more than 140 basis points in October.2 EXHIBIT 5.7 Bloomberg MMCV Screen of Two Money Market Yield Curves Source: Bloomberg Financial Markets 2 Marc R. Saidenberg and Philip E. Strahan, “Are Banks Still Important for Financing Large Businesses?” Current Issues in Economics

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bank, its expected liquidity level in the market, and of course the CD’s maturity as this will be considered relative to the money market yield curve. As CDs are issued by depository institutions as part of their short- 88 GLOBAL MONEY MARKETS term funding and liquidity requirement, issue volumes are

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repo rates are higher when agency securities are used as collateral versus governments. Moreover, the rates generally decrease with maturity that mirrors the inverted Treasury yield curve on that date. Another pattern evident in these data is that repo rates are lower than the reverse repo rates when matched by collateral type

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basis points. However, in practice, traders deliberately mismatch their books to take advantage of their expectations about the shape and level of the short-dated yield curve. The term matched book is therefore something of a misnomer in that most matched books are deliberately mismatched for this reason. Traders engage in positions

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for bonds that have traded special.10 The results of the study suggest a positive correlation between changes in a bond trading expensive to the yield curve and changes in the degree to which it trades special. This result is not surprising. Traders maintain short positions in bonds which have associated

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Quarterly Bulletin in the February 1997 and August 1997 issues. Repurchase and Reverse Repurchase Agreements 133 bond is perceived as being expensive relative to the yield curve. This circumstance creates a greater demand for short positions and hence a greater demand for the bonds in the repo market to cover the short

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coupon rate. There is no reason why this must be so, and, in fact, typically the coupon rate varies by tranche. Specifically, if the yield curve is upward-sloping, the coupon rates of the tranches will usually increase with average life. Now remember that a CMO is created by redistributing the

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of the screen, given a prepayment speed of 210 PSA, the average life is 0.22 years. If we shock the current U.S. Treasury yield curve by ±100, 200, 178 THE GLOBAL MONEY MARKETS 300 basis points, respectively, and feed those shocks into a prepayment model, what will happen to

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the security’s average life will extend from 0.22 years to 7.17 years for a 100 basis point upward parallel shift in the yield curve. Of course, this is a concern to an investor who thought that they were purchasing a money markettype instrument. Correspondingly, if interest rate decline,

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paid on the floating-rate collateral. Two common sources of basis risk are index risk and reset risk. Index risk is a type of yield curve risk that arises because the ABS floater’s coupon rate and the interest rate of the underlying collateral are usually determined at different ends of

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reference rate for the bonds is usually 1month LIBOR. Both the collateral and the bonds are indexed off LIBOR, but different sectors of the Eurodollar yield curve. The reference rate for some home equity loans is a constant maturity Treasury. Thus, the collateral is based on a spread off the 1-

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interest for March, June, September, and December 2002 contracts.2 The Eurodollar CD futures contract is used frequently to trade the short end of the yield curve and many hedgers believe this contract to be the best hedging vehicle for a wide range of hedging situations. EXHIBIT 11.2 Bloomberg Futures Contract

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the counterparty in exchange for 3-month LIBOR. In other words, sell LIBOR at the offer. The fixed rate is some spread above the Treasury yield curve with the same term to maturity as the swap. In our illustration, suppose that the 10-year Treasury yield is 8.35%. Then the

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from three market makers. The actual swap rates can be obtained simply by adding the swap spreads to the on-the-run U.S. Treasury yield curve. Exhibit 12.12 is a time series plot obtained from Bloomberg for daily values of the 5-year swap spread (in basis points) for

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market sectors that will be the primary determinant of the swap spread. Empirically, the swap curve lies above the U.S. Treasury yield curve and below the on-the-run yield curve for AA-rated banks.6 Swap fixed rates are lower than AA-rated bond yields because their lower credit due to netting

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factors is ephemeral, their influence can be considerable in the short run. Included among these factors are: (1) the level and shape of the Treasury yield curve; (2) the relative supply of fixed- and floating-rate payers in the interest rate swap market; (3) the technical factors that affect swap dealers;

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and curvature of the U.S. Treasury yield is an important influence on swap spreads at various maturities. The reason is that embedded in the yield curve are the market’s expectations of the direction of future interest rates. While these expectations are sometimes challenging to extract, the decision to borrow at

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swap would be attractive to a counterparty who had a different view on interest rates compared to the market consensus. For instance in a rising yield curve environment, forward rates will be higher than current market rates, and this will be reflected in the pricing of a swap. A Libor-in

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the swaption. SWAPNOTE®—AN EXCHANGE-TRADED INTEREST-RATE SWAP CONTRACT In both the U.S. dollar and euro markets, the position of the government bond yield curve as the benchmark instrument for pricing, valuation, and hedging purposes is eroding. In the U.S. dollar market this has been the result of the

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end of the curve.10 In Europe, the introduction of the euro in 1999 resulted in a homogeneous euro swap curve replacing individual government bond yield curves as the benchmark. The nominal volumes of swap contacts far outstrip that of government bonds in both currency areas. For instance in June 2000 there

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like to thank Nimmish Thakker at LIFFE for assistance with statistics and information on the Swapnote contract. 266 THE GLOBAL MONEY MARKETS EXHIBIT 12.14 Yield Curves for French and German Government Bonds, Pfandbriefe Securities and Euro Interest-Rate Swaps, February 2001 The increasing importance of interest rate swaps as hedging and

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will deteriorate further the relationship between government bonds and non-government bonds. An indication of this is given in Exhibit 12.14 which shows the yield curves for the swap curve as well as two government curves and a AAA-rated security. The non-government security mirrors the swap curve much more

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documentation issues, and bid-offer spreads which can make the swap market difficult and/or expensive to access. Market participants can gain exposure to the yield curve out to ten years; beyond that, government bonds must continue to be used. Contract Specification The Swapnote contract specification provides for a standardized exchangetraded futures

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factor, calculated from the swap rate is fixed for each period from the delivery date to the ith notional cash flow. The zero-coupon yield curve is constructed by LIFFE from ISDA benchmark swap fixes as at the expiry date of the contract. The first discount factor d1 is given by

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involves the maturity of assets and liabilities. Typically longer-term interest rates are higher than shorter-term rates; that is, it is common for the yield curve in the short-term (say 0–3 year range) to be positively sloping. To take advantage of this, banks usually raise a large proportion

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of their funds from the short-dated end of the yield curve and lend out these funds for longer maturities at higher rates. The spread between the borrowing and lending rates is in principle the bank’s

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bills and CDs are also considered very liquid. The second key concept is the money market term structure of interest rates. The shape of the yield curve at any one time, and expectations as to its shape in the short- and medium-term, impact to a significant extent on the ALM

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of the spread between the funding rate and the return on assets. The maturity profile, the absence of a locked-in spread and the yield curve combine to determine the total interest-rate risk of the banking book. The fourth key concept is default risk—the risk exposure that borrowers will

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the practice of varying the asset and liability gap in response to expectations about the future course of interest rates and the shape of the yield curve. The gap here is the difference between floating-rate assets and liabilities, but gap management must also be pursued when one of these elements

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not without hazards. Gap management assumes that the ALM manager is correct in his/her prediction of the future direction of interest rates and the yield curve. Expectations that turn out to be incorrect can lead to unexpected widening or narrowing of the gap spread and losses. The ALM manager must choose

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includes net interest income sensitivity analysis, typified by maturity gap and duration gap analysis, and the sensitivity of the book to parallel changes in the yield curve. 284 ■ ■ ■ ■ THE GLOBAL MONEY MARKETS The ALM desk will monitor the exposure and position the book in accordance with the limits as well as

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maturity buckets or grid points there are net positions which are the gaps that need to be managed. 4 This assumes a conventional upward-sloping yield curve. 287 Total Example Gap Profile 936.03 314.35 Floating Rate Notes purchased Bank Bills 859.45 4,180.89 Debt Securities/Gilts Fixed

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basis point” and “dollar value of an 01 [1 basis point]”, respectively. The calculation of interest-rate sensitivity assumes a parallel shift in the yield curve; that is, it assumes that every maturity point along the term structure moves by the same amount (here one basis point) and in the same

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and it represents a mark-to-market of the book. The rates used are always the zero-coupon rates derived from the benchmark government bond yield curve, although some adjustment should be made to this to allow for individual instruments. Gaps may be calculated as differences between outstanding balances at one given

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, 215 International Securities Market Association, 123 International Swap Dealers Association (ISDA), 135 benchmark, 269 Inverse floaters, 103, 169 dividing, 170 price volatility, 171 Inverted Treasury yield curve, 128 Investment banking firms, issue distribution, 83 guidelines, 123 objectives, accomplishment, 161 opportunities, 84 rate, 28, 114 vehicles, 1 Investment banks. See Integrated investment

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Collateral; Onthe-run Treasuries; Securities On-the-run issue, 33 On-the-run Treasuries, on special, 257 On-the-run U.S. Treasury yield curve, 254 On-the-run yield curve, 256 Open Market Committee. See Federal Reserve Open Market Desk, 33 Open market operations, 33, 90. See also Bank of England Open-end

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Securities and Exchange Commission Shifting interest structure, 183 Short cash, 2 Short futures, 210 Short positions, 210, 225 covering, 133 Short selling, 130 Short-dated yield curve, 130 Short-duration portfolios, 161 Short-run liabilities, excess, 285 Short-term ABS, 5, 187 Short-term assets, 285 Short-term balloon loan, 153 Short

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year, 133 U.S. Treasury rates, 98 U.S. Treasury securities, 24. See also Maturity supply, decrease, 265 U.S. Treasury yield curve. See On-the-run U.S. Treasury yield curve USSPS Index GP, 254 Valuation model, 117 Value-at-risk (VaR), 284, 302. See also Credit limits, 282 Vanilla swap, 261

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yield; CD equivalent yield; Commercial paper; Current yield; Interest-bearing securities; Stop yield behavior. See U.S. Treasury bills Index CD yield conversion. See Simple yield curve, 188, 286. See also Money markets riding, 41–42 usage, 39–42 spreads, 51, 75 margin, 111 usage, 39 Yield Analysis (YA), 10, 61,

Narrative Economics: How Stories Go Viral and Drive Major Economic Events

by Robert J. Shiller  · 14 Oct 2019  · 611pp  · 130,419 words

.” Financial Analysts Journal 37(4):63–72. Rudebusch, Glenn D., and John C. Williams. 2009. “Forecasting Recessions: The Puzzle of the Enduring Power of the Yield Curve.” Journal of Business and Economic Statistics 27(4):492–503. Saavedra, Javier, Mercedes Cubero, and Paul Crawford. 2009. “Incomprehensibility in the Narratives of Individuals with

Market Risk Analysis, Quantitative Methods in Finance

by Carol Alexander  · 2 Jan 2007  · 320pp  · 33,385 words

.5.3.1 Linear and Bilinear Interpolation I.5.3.2 Polynomial Interpolation: Application to Currency Options I.5.3.3 Cubic Splines: Application to Yield Curves I.5.4 Optimization I.5.4.1 Least Squares Problems I.5.4.2 Likelihood Methods I.5.4.3 The EM Algorithm I

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187 189 189 I.6.4 I.6.5 Convergence of Newton–Raphson scheme Solver options Extrapolation of a yield curve Linear interpolation on percentiles Fitting a currency smile A cubic spline interpolated yield curve FTSE 100 and S&P 500 index prices, 1996–2007 Sterling–US dollar exchange rate, 1996–2007 Slope of

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finding optimal portfolios to estimating parameters of GARCH models. Extrapolation and interpolation techniques such as cubic splines are illustrated by fitting currency option smiles and yield curves. Binomial lattices are applied to price European and American options consistently with the Black–Scholes–Merton model, and Monte Carlo simulation is applied to simulate

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elementary methods for interpolation and extrapolation. These are methods that ‘fill in the gaps’ where data are missing. They are required in many situations: fitting yield curves and implied volatility surfaces being two common examples. Section I.5.4 covers the optimization problems that arise in three broad areas of financial analysis

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are as shown in Figure I.5.6. How should we ‘extrapolate’ these data to obtain the spot rates up to 48 months? Since the yield curve is not a straight line, we need to fit a quadratic or higher order polynomial in order to extrapolate to the longer maturities. UK Short

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12 m 16 m 20 m 24 m 28 m 32 m 36 m 40 m 44 m Figure I.5.6 Extrapolation of a yield curve I.5.3.1 Linear and Bilinear Interpolation Given two data points, x1  y1  and x2  y2  with x1 < x2 , linear interpolation gives the value

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the ATM, 25-delta and 10-delta data: this is left as an exercise to the reader. I.5.3.3 Cubic Splines: Application to Yield Curves Spline interpolation is a special type of piecewise polynomial interpolation that is usually more accurate than ordinary polynomial interpolation, even when the spline polynomials have

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we consider cubic splines, since these are the lowest degree splines with attractive properties and are in use by many financial institutions, for instance for yield curve fitting and for volatility smile surface interpolation. We aim to interpolate a function fx using a cubic spline. First a series of knot points

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0 6254 0 5527 0 5637 0 4924 0 4667 Figure I.5.9 shows the cubic spline interpolated curve. Splines are also used for yield curve fitting where the problem is to find the best fitting curve to interest rates on a variety of different liquid market instruments of similar maturities

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.00 2.75 2.50 6 12 18 24 30 36 42 Maturity (Months) 48 54 60 Figure I.5.9 A cubic spline interpolated yield curve natural cubic splines to interest rates themselves is not necessarily the best approach. The best fit is often obtained by applying basis splines to the

Expected Returns: An Investor's Guide to Harvesting Market Rewards

by Antti Ilmanen  · 4 Apr 2011  · 1,088pp  · 228,743 words

Bond risk premium 9.1 INTRODUCTION, TERMINOLOGY, AND THEORIES 9.2 HISTORICAL AVERAGE RETURNS 9.3 ALTERNATIVE EX ANTE MEASURES OF THE BRP 9.4 YIELD CURVE STEEPNESS: IMPORTANT PREDICTIVE RELATIONS 9.5 EXPLAINING BRP BEHAVIOR: FIRST TARGETS, THEN FOUR DRIVERS 9.6 TACTICAL FORECASTING—DURATION TIMING 9.7 NOTES Chapter 10

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risk premium during bad times when investors’ risk aversion is especially high. Many studies document countercyclical ex ante Sharpe ratios based on valuation ratios or yield curve steepness and then assume that such predictability reflects investors’ rational risk assessments and preferences. While I firmly believe that wealth-dependent risk aversion (implying

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BRP has been near zero through the 2000s but could well rise in the 2010s. • Duration-timing models predict near-term bond returns. A steep yield curve, weak economic growth, or weak equity markets, as well as positive bond market momentum, have historically been bullish indicators. 9.1 INTRODUCTION, TERMINOLOGY, AND

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-term changes in long yields and the return-based BRPH. Alternative theories Which of the two components has a larger influence on the yield curve shape? To interpret the yield curve, one can usefully contrast the classic pure expectations hypothesis (PEH) with the random walk hypothesis. The PEH makes the extreme assumption that

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initial yield advantage; thus all bond investments have the same expected return). The random walk hypothesis makes the opposite extreme assumption, that an upward-sloping yield curve only reflects required compensation for bearing duration risk and does not contain any information at all about the market’s rate expectations. Since both the

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in numbers Sources: Bank of America Merrill Lynch, Center for Research in Security Prices, Ibbotson Associates (Morningstar). What about yield data? Looking at average yield curve shapes (e.g., the Fed’s fitted Treasury curves since 1961) tells a similar story. Average yields rise monotonically between one-year and 7-year

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ALTERNATIVE EX ANTE MEASURES OF THE BRP I discuss four ex ante measures: curve steepness and three smarter measures of the bond risk premium (BRP). Yield curve steepness (YC) Yield curve steepness is the simplest and most popular proxy for the ex ante BRP, but it has its flaws. Since the shape of the

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for the YC (i.e., no predictive ability). The Cochrane–Piazzesi measure fares better, with a 0.32 correlation. Table 9.2. Predictive power of yield curve steepness: Correlations with future returns and yield changes, 1962–2009 Sources: Bloomberg, Federal Reserve Board, Center for Research in Security Prices, Bank of America

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between 1981 and 2003, presumably due to lower long-term inflation expectations. Thus, formal term structure models often include at least two factors. Informal yield curve commentary suggests that central bank policy determines the front end of the curve while the market’s inflation expectations determine back-end levels. This is

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and why it has “missed” secular trends in both the level and volatility of inflation. We also better understand why, over short horizons, the yield curve shape (forward rates) primarily forecasts excess bond returns, whereas over a 5-year horizon the curve possesses little return-forecasting ability (but rather predicts future

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timevarying BRP. 9.5 EXPLAINING BRP BEHAVIOR: FIRST TARGETS, THEN FOUR DRIVERS Identifying the BRP target series. There are numerous ways to break down the yield curve into (unobservable) rate expectation and risk premium components. My preferred approach uses survey data in some way. Without this anchor, the values can be

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variation in required BRPs. No studies have extended the empirical analysis of level-dependent inflation premia before World War II but here is some speculation. Yield curves were typically inverted in the 19th century when real risks dominated, and typically upward sloping in the 20th century when inflation risks dominated. The

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decade and the fiscal outlook may become a first-order driver of bond yields. Regulatory effects and pension fund demand:• The fact that the yield curve is typically flat or inverted at long maturities partly reflects demand from pension funds and other institutional investors with long-dated liabilities (although some yield

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the consensus view was 30 bp to 50 bp. Near-substitutes to Treasuries also benefited from this demand, but to a lesser extent. Cyclical factors Yield curve shape is closely related to (interrelated) business cycles, credit cycles, and monetary policy cycles. YC inversions predict recessions as defined by the National Bureau

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the YC and negative C-P BRPs also ordinarily coincide with Fed tightening. Figure 9.11. Countercyclical curve steepness moves with the unemployment rate—but yield curve inversions predict recessions (as well as curve steepenings) Sources: Bloomberg, Federal Reserve Board. Vanishing monetary policy premium. It used to be the case that

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) than by time-varying risk premia. Mean-reverting rate expectations (which are negatively related to the level of inflation) have offset the impact on yield curve steepness of the inflation risk premium (which varies positively with the level of inflation). 9.6 TACTICAL FORECASTING—DURATION TIMING I focused on bond market

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2008) and Rudebusch (2010). On empirical models with survey data, see Kim–Orphanides (2005), Kim–Wright (2005), and Rosenberger–Maurer (2008). On the relation between yield curve and economic growth, see Harvey (1989) and Estrella (2005). Recent works that discuss the idea of a level-dependent inflation premium include Backus–Wright (2006

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Weak real activity and a low profits/GDP ratio are bearish predictors. The two best growth predictors in financial markets give a mixed message—steep yield curves predict high credit returns while strong equity markets (somewhat unexpectedly) predict low credit returns. Credit bonds appear to exhibit short-term momentum and longer

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negative. The three most robust empirical relations are that wider swap spreads coincide with strong public finances, risk aversion related to banking troubles, and flatter yield curves. I have already covered the first two. Turning to the third, the inverse correlation between curve steepness and swap spread has been attributed to

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Treasury scarcity, monetary policy stance, and issuer reactions to the yield curve environment. Admittedly, the determinants of swap spreads have not been very robust over time. There have been more structural changes in swap spread dynamics

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commodity portfolio (general backwardation of commodity term structures predicts higher near-term returns), as have certain interest rate indicators (low short rates and an inverted yield curve both predict high near-term commodity returns). Momentum-based dynamic strategies, such as trend following, have been even more successful; I will describe them

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links between short or long rate changes and the value premium. I do not find even consistent signs for a contemporaneous (or predictive) relation but yield curve steepening has a mild positive contemporaneous correlation with quarterly VMG returns. Some authors argue that the value premium is countercyclical. However, when I compute

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destroying. Exploiting a firm’s competitive advantage is the main sustainable source of abnormal profits. 16.4 ASSET MARKET RELATIONS Stock market returns and yield curve steepness are the two financial series whose relation to economic growth has attracted the most attention. I discuss each of these before reviewing sensitivities to

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successful recession predictors. Many other financial series, notably credit spreads, also track business cycles but in a more contemporaneous fashion. The best explanation for the yield curve’s predictive ability is that it proxies for the Fed’s monetary policy stance: a steep (flat/inverted) curve reflects easy (tight) monetary policy.

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returns are predictably high (low) after business cycle troughs (peaks). These studies identify expected returns by the ability of some countercyclical indicator (such as yield curve steepness or consumption–wealth ratio) to predict near-term returns—and assume that fitted realized returns in a regression are the expected returns of a

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if we do not know the underlying reason for the generic cheapness. • Popular indicators include earnings yields and dividend yields for equities, real yields and yield curve steepness for Treasuries, and various credit spreads for non-government bonds. • Prospective real long-term returns can be compared across asset classes (apples with

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return advantage). The economic content of the identity in (22.4) comes from assuming that investor expectations are rational and consistent: given an upward-sloping yield curve, investors in the aggregate either expect rising yields to offset positive carry or they expect (and presumably require) a return advantage for longer bonds.

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the best predictor of next year’s spot yield curve? Implied spot yield curve one year forward Current spot yield curve Roll or slide is another nuanced aspect of carry. The random walk hypothesis assumes that the current yield curve is the best predictor of the future yield curve. If an upward-sloping yield curve remains unchanged over the next year, a

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boosts the corporate bond’s expected return in excess of the duration-matched Treasury; in addition, both bonds can benefit from the “rolling down the yield curve” effect if the Treasury curve is upward sloping. • When the term structure of commodity futures prices is in backwardation (downward sloping), commodity futures tend

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to “roll up the curve” as they approach expiration. (Note that both rolling down the yield curve and rolling up the price curve imply rolldown price gains.) • Options losing their time value have a similar characteristic: prices change simply due to the

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, carry-oriented strategies across G10 bond markets (overweighting currency-hedged bonds in countries with steep curves and underweighting them in countries with inverted or flat yield curves) have achieved good long-run SRs. Corporate credits and interest rate swaps For credit spreads, I ask whether the (option-adjusted) spread reflects expected

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each regime, but it reveals that average equity market yields are low during booms and high during stagnations—especially during inflationary and volatile stagnations. Yield curve steepness mainly depends on inflation conditions and is steepest in disinflationary stagnations. Credit spreads mainly depend on growth conditions and are widest in volatile stagnations

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regimes, reflecting stagflationary conditions during the two oil crises of the 1970s. As expected, monetary policy easing was most prominent (short rates fell and the yield curve was steep) in disinflationary stagnations. Table 26.3. Ex ante indicators in four real activity and inflation regimes, average quarterly values, 1960–2009 Sources:

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are effectively riskless assets. Indeed, these institutions’ demand for long-dated bonds has contributed to the flatness or inversion of the back end of many yield curves. In many real-world cases, the investment horizon is uncertain (and the perceived horizon is often positively related to market conditions and investor risk

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lockup: Valuing liquidity as a real option,” working paper, available at SSRN: http://ssrn.com/abstract=1291842 Ang, Andrew; and Joseph S. Chen (2010), “Yield curve predictors of foreign exchange returns,” working paper, available at SSRN: http://ssrn.com/abstract=1542342 Ang, Andrew; William N. Goetzmann; and Stephen M. Schaefer (2009

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Cochrane, John H.; and Monika Piazzesi (2005), “Bond risk premia,” American Economic Review 95, 138–160. Cochrane, John H.; and Monika Piazzesi (2008), “Decomposing the yield curve,” University of Chicago working paper. Cogley, Timothy; and Thomas J. Sargent (2008), “The market price of risk and the equity premium: A legacy of the

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.; and Campbell R. Harvey (2006), “The tactical and strategic value of commodity futures,” Financial Analysts Journal, 62(2), 69–97. Estrella, Arturo (2005), “The yield curve as a leading indicator: Frequently asked questions,” Federal Reserve Bank of New York working paper, available at http://www.newyorkfed.org/research/capital_markets/ycfaq

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.S. bond returns,” Journal of Fixed Income 7(1), 22–37 (originally published as part of a Salomon Brothers research paper series titled “Understanding the Yield Curve”). Ilmanen, Antti (2003a), “Expected returns on stocks and bonds,” Journal of Portfolio Management 29(2), 7–27. Ilmanen, Antti (2003b), “Stock–bond correlations,” Journal

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and Martin Schneider (2007), “Inflation illusion, credit, and asset pricing,” NBER working paper 12957. Piazzesi, Monika; and Martin Schneider (2008), “Bond positions, expectations, and the yield curve,” Federal Reserve Bank of Atlanta working paper 2008-02. Plazzi, Alberto; Walter Torous; and Rossen Valkanov (2010), “Expected returns and the expected growth in rents

…

cycles determinants emerging markets evidence for GDP inflation long-horizon investors long-term growth as risk factor risk premia speed limits theory time-varying premium yield curve steepness habit formation Hallowe’en indicator Hasbrouck, Joel hedge funds (HFs) accessing returns alphas betas biases capacity characteristics cost control CTA performance decomposed index

…

NCREIF real estate index noise traders nominal bonds non-government bonds non-zero yield spreads carry strategies empirical “horse races” future excess returns market expectations yield curve behavior OASs see option-adjusted spreads option-adjusted spreads (OASs) options buying/selling equity index OASs rolling yield single-stock tail risks trading strategies volatility

…

wealth-dependent risk aversion wealth wealth-dependent risk aversion (WDRA) windfall gains window dressing world wealth Wright see Kim—Wright Yale Endowment YC see yield curve steepness yen yield asset class real yields bonds BRP historical averages convenience yield credit spreads currency carry D/P earnings HY bonds non-zero yield

…

spreads relative valuation rental yield rolling yield YTM see also non-zero yield spreads yield curve steepness (YC) bond yield BRP cyclical factors economic growth forward-looking indicators future bond returns non-zero yield spreads poor prediction secular prediction yield

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems

by Irene Aldridge  · 1 Dec 2009  · 354pp  · 26,550 words

prices just two minutes following its announcement. Fleming and Remolona (1999) estimate the high-frequency impact of macroeconomic announcements on the entire U.S. Treasury yield curve. Fleming and Remolona (1999) measure the impact of 10 distinct announcement classes: consumer price index (CPI), durable goods orders, gross domestic product (GDP), housing starts

…

Remolona (1999) were released at 8:30 A . M. The authors then measure the significance of the impact of the news releases on the entire yield curve from 8:30 A . M. to 8:35 A . M., and document statistically significant average changes in yields in response to a 1 percent positive

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least has got it. There are one or two EWA indicators that were flashing amber in the United States in mid-2018. The U.S. yield curve plots Treasuries with maturities ranging from four weeks to thirty years. The gap between long and short yields turning negative has been a reliable indicator

…

of recession. The yield curve was flattening during the first few months of 2018. Ed Yardeni’s Boom-Bust Barometer, which measures spot prices of industrial inputs like copper, steel

…

, 306; unionization in, 113–14; wage stagnation in, 6, 48, 51, 54–55, 58, 61–62, 71, 214, 301, 308; work-life balance in, 73; yield curve in, 208; young people’s living arrangements in, 37, 39, 85 United States Conference of Mayors, 23 U.S. General Social Survey (GSS), 227, 330

…

, Simon, 175–77, 214 Xi Jingping, 317 XpertHR, 308 Yagan, Danny, 96 Yamarone, Richard, 185–86 Yardeni, Edward, 208 Yellen, Janet, 165, 304 Yemen, 244 yield curve, 208 Zaninotto, Paola, 223 zero-hours contracts, 35, 104, 270 zero lower bound (ZLB), 160, 161 Ziblatt, Daniel, 347 Zimmermann, Klaus F., 57 Znojmo, Moravia

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. For this reason, Keynes opposed the use of ‘dear money’ to check a boom. The effect of a rise in the interest rate on the yield curve would be very difficult to reverse. A low enough long-term rate of interest cannot be achieved if we allow it to be believed that

…

or ‘price’ that the central bank charges for lending money to member banks. The theory is that a change in the base rate pushes the yield curve upwards or downwards. It is immediately transmitted to the interbank lending rate. Banks will then adjust their own lending rates, both short-term and long

…

‘increase the amount of shorter dated securities’, they were able to surprise investors and continue, at least in their own view, to make impacts on yield curves.61 Through the four channels above, the injection of narrow money (M1) was supposed to influence the movement of broad money and, through broad money

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