Search Results
Report
What was the market's view of U.K. monetary policy? Estimating inflation risk and expected inflation with indexed bonds
A measure of the credibility of monetary policy is the inflation risk premium in nominal yields. This will be time varying and can be estimated by combining the information in the nominal term structure with that in the real term structure. We estimate these risk premia using a generalized CIR affine-yield model, with one factor driving the real term structure of monthly observations on two-year, five-year and ten-year UK index-linked debt and two factors driving the term structure of the corresponding nominal yields. Our estimates show that the inflation risk premium contributes on average ...
Journal Article
Market returns and mutual fund flows
With the increased popularity of mutual funds come increased concerns. Namely, could a sharp drop in stock and bond prices set off a cascade of redemptions by mutual fund investors and could the redemptions exert further downward pressure on asset markets? The authors analyze this relationship by using instrumental variables--a measuring technique previously unapplied to market returns and mutual fund flows--to determine the effect of returns on flows. Despite market observers' fears of a downward spiral in asset prices, the authors conclude that the short-term effect of market returns on ...
Report
The term structure of announcement effects
We analyze high-frequency responses of U.S. Treasury yields across the maturity spectrum to macroeconomic announcements. We find that surprises in the announcements evoke the sharpest reactions from the intermediate maturities, thus forming striking hump-shaped curves of announcement effects. We then fit an affine-yield model to the yield changes using the announcement surprises as GMM instruments. The model estimates imply that the announcements elicit larger shocks to an expected future target interest rate than to the current short-term interest rate and that different types of ...
Report
A three-factor econometric model of the U.S. term structure
We estimate a three-factor model to fit both the time-series dynamics and cross-sectional shapes of the U.S. term structure. In the model, three unobserved factors drive a discrete-time stochastic discount process, with one factor reverting to a fixed mean and a second factor reverting to a third factor. To exploit the conditional density of yields, we estimate the model with a Kalman filter, a procedure that also allows us to use data for six maturities without making special assumptions about measurement errors. The estimated model reproduces the basic shapes of the average term structure, ...
Journal Article
Finance companies, bank competition, and niche markets
During the 1980s, U.S. commercial banks faced increased competition in their lending activity from large finance companies. This article analyzes the differential performance of banks and finance companies in various segments of the consumer and business credit markets. In particular, it explores why banks were seemingly slow to take advantage of opportunities in fast-growing finance company niche markets.
Report
Price formation and liquidity in the U.S. treasuries market: evidence from intraday patterns around announcements
We find striking intraday adjustment patterns for price volatility, trading volume, and bid-ask spreads in the U.S. Treasuries market around the time of macroeconomic announcements. The patterns suggest certain hypotheses about price formation and liquidity provision in multiple-dealer markets. These hypotheses assign new importance to public information, heterogeneous views, sluggish price discovery, traditional inventory-control behavior by market makers, and liquidity traders who react with a lag to price changes.
Report
Inflation risk in the U.S. yield curve: the usefulness of indexed bonds
The inflation-indexed bonds the U.S. Treasury plans to issue will reduce the expected borrowing cost if the yield curve reflects a risk premium for inflation. In the United Kingdom, indexed bonds are also used to extract inflationary expectations and thus to guide monetary policy. The bonds will produce a more reliable measure of such expectations if the inflation risk premium is taken into account. We estimate such a risk premium for the United States by means of a two-factor affine-yield model of the term structure. The model allows both the inflation risk premium and real term premium to ...
Journal Article
What moves the bond market?
In an examination of the U.S. Treasury securities market, the authors attempt to explain the sharpest price changes and most active trading episodes. They find that each of the twenty-five largest price shocks and twenty-five greatest trading surges can be attributed to just-released macroeconomic announcements. They also measure the market's average reactions to theses announcements and analyze the extent to which the reactions depend on the degree of announcement surprise and on prevailing market conditions. The market's price and trading reactions are found to reflect differences of ...