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Working Paper
Estimating real and nominal term structures using Treasury yields, inflation, inflation forecasts, and inflation swap rates
This paper develops and estimates an equilibrium model of the term structures of nominal and real interest rates. The term structures are driven by state variables that include the short term real interest rate, expected inflation, a factor that models the changing level to which inflation is expected to revert, as well as four volatility factors that follow GARCH processes. We derive analytical solutions for the prices of nominal bonds, inflation-indexed bonds that have an indexation lag, the term structure of expected inflation, and inflation swap rates. The model parameters are estimated ...
Working Paper
Estimating the cost of U.S. indexed bonds
A presentation of an equilibrium bond-pricing model driven by two stochastic factors: the real interest rate and the expected rate of inflation. The models parameters are estimated using a maximum-likelihood technique based on a Kalman filter.
Conference Paper
The opening of new markets for bank assets
Conference Paper
Bank deposit insurance and business cycles: controlling the volatility of risk-based premiums
Proposals to make deposit insurance risk-based need to consider how premiums would fluctuate over the business cycle. This paper derives a new deposit insurance contract that has the following three features: 1) it is fairly priced in the sense that the insurer conveys no subsidy to the bank; 2) the insurance rate can be made as stable as desired by lengthening the "average" maturity of the contract; 3) the rate can be frequently updated as new information regarding the bank's financial condition is obtained. These characteristics are achieved with a contract that is a combination of ...
Report
Why do banks target ROE?
Historically, nonfinancial corporations relied on performance targets linked to their EPS. Up until the 1970s, banks also appeared to follow a similar practice, but since then they have favored ROE. Equity investors seem to be aware of these differences because EPS growth is better at explaining nonfinancials? stock market value while ROE is better at explaining banks? market values. In this paper we present a model of a bank with fixed-rate deposit insurance that faces increasing competition that erodes its charter value. When under these conditions the bank chooses its capital to maximize ...
Working Paper
Inflation expectations, real rates, and risk premia: evidence from inflation swaps
This paper develops a model of the term structures of nominal and real interest rates driven by state variables representing the short-term real interest rate, expected inflation, inflation?s central tendency, and four volatility factors that follow GARCH processes. We derive analytical solutions for nominal bond yields, yields on inflation-indexed bonds that have an indexation lag, and the term structure of expected inflation. Unlike prior studies, the model?s parameters are estimated using data on inflation swap rates, as well as nominal yields and survey forecasts of inflation. The ...
Conference Paper
Deposit insurance premiums and the value of the banking insurance fund: should they be linked?
A common feature of many insurance systems is that they are "backed" by an insurance fund and insurance premiums are adjusted to target this fund's balance. This study analyzes the fund targeting policy of the Federal Deposit Insurance Corporation (FDIC). It examines the distortions to banks' cost of deposit financing that result from setting premiums in this manner. The study's framework is a multi-period, multi-bank contingent claims model where the stochastic rates of return on individual banks' assets are assumed to be correlated and match the actual empirical distribution of a sample ...
Conference Paper
Bank consolidation and consumer loan interest rates