Ambiguity Aversion and the Term Structure of Interest Rates

This paper studies the term structure implications of a simple structural economy in which the representative agent displays ambiguity aversion, modeled by Multiple Priors Recursive Utility. Bond excess returns reflect a premium for ambiguity, which is observationally distinct from the risk premium of affine yield curve models. The ambiguity premium can be large even in the simplest logutility model and is non zero also for stochastic factors that have a zero risk premium. A calibrated low-dimensional two-factor economy with ambiguity is able to reproduce the deviations from the expectations hypothesis documented in the literature, without modifying in a substantial way the nonlinear mean reversion dynamics of the short interest rate. In this economy, we do not find any apparent tradeoffs between fitting the first and second moments of the yield curve and the large equity premium.General Equilibrium, Term Structure of Interest Rates, Ambiguity Aversion, Expectations Hypothesis, Campbell-Shiller Regression

The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa

This paper studies drivers of high-frequency (daily) dynamics of the South African rand vis-à-vis the dollar from January 2001 to July 2007. We find strong nonlinear effects of commodity prices, perceived country and emerging market risk premium and changes in the dollareuro exchange rate on changes in daily returns of the rand-dollar exchange rate. We also identify a one-sided nonlinear mean reversion to the long-term monetary equilibrium. In addition we establish very short-lived effects on the exchange rate of selected macroeconomic surprises and central bank communication aimed at talking up the rand.http://deepblue.lib.umich.edu/bitstream/2027.42/64416/1/wp955.pd

Real exchange rate dynamics in transition economies : a nonlinear analysis

We examine the behavior of the real exchange rates of nine transition economies during the 1990s. We propose an empirical model rationalized on the basis of standard economic models in the tradition of Mundell-Fleming-Dornbusch and Harrod-Balassa-Samuelson, allowing explicitly for real interest rate differentials and (implicitly) for productivity differentials to have an impact on real exchange rate equilibrium and employing nonlinear modeling techniques that are consistent with recently developed economic theories and observed regularities. Using a nonlinear multivariate generalization of the Beveridge-Nelson decomposition applied to our models, we also identify the permanent and temporary components of these real exchange rates implied by our estimates. The results have a natural interpretation and clear policy implications

Mean reversion in stock index futures markets: a nonlinear analysis

Several stylized theoretical models of futures basis behavior under nonzero transactions costs predict nonlinear mean reversion of the futures basis towards its equilibrium value. Nonlinearly mean-reverting models are employed to characterize the basis of the SandP 500 and the FTSE 100 indices over the post-1987 crash period, capturing empirically these theoretical predictions and examining the view that the degree of mean reversion in the basis is a function of the size of the deviation from equilibrium. The estimated half lives of basis shocks, obtained using Monte Carlo integration methods, suggest that for smaller shocks to the basis level the basis displays substantial persistence, while for larger shocks the basis exhibits highly nonlinear mean reversion towards its equilibrium value. © 2002 Wiley Periodicals, Inc

Modeling nonlinear and heterogeneous dynamic linkages in international monetary markets

In this paper we examine the dynamic linkages of international monetary markets over the 2004 - 2009 period using daily short-term interbank interest rates of three of the most advanced countries (France, United Kingdom and United States). Empirical results from vector error-correction models (VECM) and smooth transition error-correction models (STECM) indicate strong evidence of nonlinear and heterogeneous causalities between the three interest rates considered. We also find that exogenous shifts in the US short-term interest rate led those in France and in the UK within a horizon of one to two days. Finally, the national interest rate nexus appears to nonlinearly converge towards a steady state or a common long-run equilibrium because it is subject to structural change beyond a certain interest rate threshold. Our findings have important implications for the actions of leading central banks (ECB, Bank of England, and US Fed) since the behavior of short-term interest rates can be viewed as an indicator of the degree of central banks’ policy interdependence.international monetary market relationships, short-term interest rates, VECMs and STECMs

The real interest rate differential: international evidence based on nonlinear unit root tests

This paper aims at testing international parity conditions by using nonlinear unit root tests advocated by Kapetanios et al. (2003, KSS). Results from the KSS tests based on 17 countries (G7 and 10 Asian countries) overwhelmingly show that the adjustment of real interest rates towards the RIP follows a nonlinear process except for the Malaysian relationships with both the US and Japan. Overall, the empirical results are in favor of RIP using the US and Japan as the center countries but only if nonlinearities are accounted for in the data generating process. Our findings confirm that interest rate differentials, like the real exchange rates reported in recent literature, display a nonlinear mean reversion process.real interest parity; nonlinearities; unit root tests

Interest rate dynamics in Kenya: Commercial banks’ rates and the 91-Day Treasury bill rate

This paper analyses the implicit dynamics underlying the interest rate structure in Kenya. For this purpose we use data on four commercial banks’ interest rates (Deposits, Savings, Lending and Overdraft) together with the 91-Day Treasury Bill rate, for the time period July 1991 – August 2010, and apply various techniques based on long-range dependence and, in particular, on fractional integration. The results indicate that all series examined are nonstationary with orders of integration equal to or higher than 1. The analysis of various spreads suggests that they also are nonstationary I(1) variables, the only evidence of mean reversion being obtained in the case of the Deposits – Treasury Bill rate spread with autocorrelated errors.The second-named author gratefully acknowledges financial support from the Ministerio de Ciencia y Tecnología (ECO2008-03035 ECON Y FINANZAS, Spain) and from a PIUNA Project of the University of Navarra

Interest rate dynamics in Kenya : commercial banks' rates and the 91 day treasury bill rate

This paper analyses the implicit dynamics underlying the interest rate structure in Kenya. For this purpose we use data on four commercial banks’ interest rates (Deposits, Savings, Lending and Overdraft) together with the 91-Day Treasury Bill rate, for the time period July 1991 – August 2010, and apply various techniques based on long-range dependence and, in particular, on fractional integration. The results indicate that all series examined are nonstationary with orders of integration equal to or higher than 1. The analysis of various spreads suggests that they also are nonstationary I(1) variables, the only evidence of mean reversion being obtained in the case of the Deposits – Treasury Bill rate spread with autocorrelated errors