The advantages of using excess returns to model the term structure

We advocate the use of excess returns rather than yields or log prices in analysing the risk neutral dynamics of the term structure. We show that under standard assumptions, excess returns are affine in the risk neutral innovations in the factors. This framework has several important advantages. First, it allows for an easy estimation of models that are more flexible than the AR(1). Indeed, we estimate models with more general dynamics, like ARFIMA(p,d,q), almost as easily as AR(1). Second, within our framework the dimension of the unrestricted model is the same for the AR(1) as it is for the richer models, and does not expand in line with the state vector as it does in a yield or log price framework. This makes it appropriate to test all of these risk neutral dynamic specifications against the same OLS unrestricted alternative. Our results for the US Treasury bond market show that the unrestricted model is preferred to the AR(1) by the Bayesian Information Criterion, but the opposite conclusion is reached for more flexible models. A final advantage of the excess returns framework is that the pricing errors are much lower than for the equivalent log price system

Estimating the term structure with linear regressions: Getting to the roots of the problem

Linear estimators of the affine term structure model are inconsistent since they cannot reproduce the factors used in estimation. This is a serious handicap empirically, giving a worse fit than the conventional ML estimator that ensures consistency. We show that a simple self-consistent estimator can be constructed using the eigenvalue decomposition of a regression estimator. The remaining parameters of the model follow analytically. Estimates from this model are virtually indistinguishable from that of the ML estimator. We apply the method to estimate various models of U.S. Treasury yields. These exercises greatly extend the range of models that can be estimated

Fractional Integration of the Price-Dividend Ratio in a Present-Value Model.

We re-examine the dynamics of returns and dividend growth within the present-value framework of stock prices. We find that the finite sample order of integration of returns is approximately equal to the order of integration of the first-differenced price-dividend ratio. As such, the traditional return forecasting regressions based on the price-dividend ratio are invalid. Moreover, the nonstationary long memory behaviour of the price-dividend ratio induces antipersistence in returns. This suggests that expected returns should be modelled as an ARFIMA process and we show this improves the forecast ability of the present-value model in-sample and out-of-sample

Fractional Integration of the Price-Dividend Ratio in a Present-Value Model.

We re-examine the dynamics of returns and dividend growth within the present-value framework of stock prices. We find that the finite sample order of integration of returns is approximately equal to the order of integration of the first-differenced price-dividend ratio. As such, the traditional return forecasting regressions based on the price-dividend ratio are invalid. Moreover, the nonstationary long memory behaviour of the price-dividend ratio induces antipersistence in returns. This suggests that expected returns should be modelled as an ARFIMA process and we show this improves the forecast ability of the present-value model in-sample and out-of-sample

Adrenal function recovery after durable oral corticosteroid sparing with benralizumab in the PONENTE study

Background Oral corticosteroid (OCS) dependence among patients with severe eosinophilic asthma can cause adverse outcomes, including adrenal insufficiency. PONENTE's OCS reduction phase showed that, following benralizumab initiation, 91.5% of patients eliminated corticosteroids or achieved a final dosage ≤5 mg·day-1 (median (range) 0.0 (0.0-40.0) mg). Methods The maintenance phase assessed the durability of corticosteroid reduction and further adrenal function recovery. For ~6 months, patients continued benralizumab 30 mg every 8 weeks without corticosteroids or with the final dosage achieved during the reduction phase. Investigators could prescribe corticosteroids for asthma exacerbations or increase daily dosages for asthma control deteriorations. Outcomes included changes in daily OCS dosage, Asthma Control Questionnaire (ACQ)-6 and St George's Respiratory Questionnaire (SGRQ), as well as adrenal status, asthma exacerbations and adverse events. Results 598 patients entered PONENTE; 563 (94.1%) completed the reduction phase and entered the maintenance phase. From the end of reduction to the end of maintenance, the median (range) OCS dosage was unchanged (0.0 (0.0-40.0) mg), 3.2% (n=18/563) of patients experienced daily dosage increases, the mean ACQ-6 score decreased from 1.26 to 1.18 and 84.5% (n=476/563) of patients were exacerbation free. The mean SGRQ improvement (-19.65 points) from baseline to the end of maintenance indicated substantial quality-of-life improvements. Of patients entering the maintenance phase with adrenal insufficiency, 32.4% (n=104/321) demonstrated an improvement in adrenal function. Adverse events were consistent with previous reports. Conclusions Most patients successfully maintained maximal OCS reduction while achieving improved asthma control with few exacerbations and maintaining or recovering adrenal function

Monetary Policy at the Zero Lower Bound: Information in the Federal Reserve's Balance Sheet

I examine the impact of the actual purchases of Treasury securities by the Federal Reserve on Treasury yields. Using structural stability tests I find significant breaks in the relation between these variables. I find that in the zero lower bound period following the first phase of quantitative easing, May 2010 to December 2015, the actual purchases of Treasury securities by the Federal Reserve are positively related to changes in Treasury yields. This effect is driven primarily by the positive relation of the Treasury purchases with the bond risk premium, but they are also positively related to the expected inflation rate and the real rate of interest. The evidence is consistent with the liquidity channel hypothesis as put forward by Krishnamurthy and Vissing-Jorgensen (2011), since the Federal Reserve's Treasury purchases also strongly predict a lower corporate yield spread. Using a macro-finance term structure model I provide counterfactual estimates of the Treasury yields in the zero lower bound period. The counterfactual 10-year yield and the term premium are considerably smaller during QE2 but close to the actual time series for most of the rest of the lower bound period

Estimating the term structure with linear regressions: Getting to the roots of the problem

Linear estimators of the affine term structure model are inconsistent since they cannot reproduce the factors used in estimation. This is a serious handicap empirically, giving a worse fit than the conventional MLE estimator that ensures consistency. We show that a simple self-consistent estimator can be constructed using the eigenvalue decomposition of a regression estimator. The remaining parameters of the model follow analytically. The fit of this model is virtually indistinguishable from that of the MLE. We apply the method to estimate the model of the U.S. Treasury yields and a joint model of the U.S. and German yield curves