Examining Simple Joint Macroeconomic and Term-Structure Models: A Practitioner's Perspective

The primary objective of this paper is to compare a variety of joint models of the term structure of interest rates and the macroeconomy. To this end, we consider six alternative approaches. Three of these models follow from the work of Diebold and Li (2003) with a generalization in Bolder (2006). The fourth model is a regression-based approach motivated entirely by empirical considerations. The fifth model follows from the seminal work of Ang and Piazzesi (2003), who suggest a joint macro-finance model in a discrete-time affine setting. The final model, which we term an observed-affine model, represents an adjustment to the Ang-Piazzesi model that essentially relaxes restrictions on the state-variable dynamics by making them observable. The observed-affine model is similar in spirit to work by Colin-Dufresne, Goldstein, and Jones (2005) and Cochrane and Piazzesi (2006). Using monthly Canadian data from 1973 to 2005, we compare each of these models in terms of their out-of-sample ability to forecast the transition density of zero-coupon rates. We also examine a simple approach aimed at permitting a subset of the parameters in the non-affine models to vary over time. We find, similar to Bolder (2006), that the Diebold and Li (2003) motivated approaches provide the most appealing modelling alternative across our different comparison criteria.Econometric and statistical methods; Financial Markets; Interest rates

Combining Canadian Interest-Rate Forecasts

Model risk is a constant danger for financial economists using interest-rate forecasts for the purposes of monetary policy analysis, portfolio allocations, or risk-management decisions. Use of multiple models does not necessarily solve the problem as it greatly increases the work required and still leaves the question "which model forecast should one use?" Simply put, structural shifts or regime changes (not to mention possible model misspecifications) make it difficult for any single model to capture all trends in the data and to dominate all alternative approaches. To address this issue, we examine various techniques for combining or averaging alternative models in the context of forecasting the Canadian term structure of interest rates using both yield and macroeconomic data. Following Bolder and Liu (2007), we study alternative implementations of four empirical term structure models: this includes the Diebold and Li (2003) approach and three associated generalizations. The analysis is performed using more than 400 months of data ranging from January 1973 to July 2007. We examine a number of model-averaging schemes in both frequentist and Bayesian settings, both following the literature in this field (such as de Pooter, Ravazzolo and van Dijk (2007)) in addition to introducing some new combination approaches. The forecasts from individual models and combination schemes are evaluated in a number of ways; preliminary results show that model averaging generally assists in mitigating model risk, and that simple combination schemes tend to outperform their more complex counterparts. Such findings carry significant implications for central-banking analysis: a unified approach towards accounting for model uncertainty can lead to improved forecasts and, consequently, better decisions.Interest rates; Econometric and statistical methods

Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis

The stochastic simulation model suggested by Bolder (2003) for the analysis of the federal government's debt-management strategy provides a wide variety of useful information. It does not, however, assist in determining an optimal debt-management strategy for the government in its current form. Including optimization in the debt-strategy model would be useful, since it could substantially broaden the range of policy questions that can be addressed. Finding such an optimal strategy is nonetheless complicated by two challenges. First, performing optimization with traditional techniques in a simulation setting is computationally intractable. Second, it is necessary to define precisely what one means by an "optimal" debt strategy. The authors detail a possible approach for addressing these two challenges. They address the first challenge by approximating the numerically computed objective function using a function-approximation technique. They consider the use of ordinary least squares, kernel regression, multivariate adaptive regression splines, and projection-pursuit regressions as approximation algorithms. The second challenge is addressed by proposing a wide range of possible government objective functions and examining them in the context of an illustrative example. The authors' view is that the approach permits debt and fiscal managers to address a number of policy questions that could not be fully addressed with the current stochastic simulation engine.Debt management; Econometric and statistical methods; Fiscal policy; Financial markets

Optimization in a Simulation Setting: Use of Function Approximation in Debt Strategy Analysis

This paper provides an analysis of how a firm's decision to serve a foreign market by exporting or by engaging in foreign direct investment (FDI) affects firm productivity, when productivity is endogeneous as a function of training. The main result of our paper is that, with endogeneous productivity, exporting results in lower productivity than does FDI, but exporting may result in higher or lower employment and output than does FDI. We also show that FDI has lower employment, higher training, higher wages and higher productivity than does production for the home market. A further interesting and unexpected result of our model is that exporting results in the same level of training and productivity as does production for the home market. However, under the same demand conditions, the exporting firm employs less labour for foreign production than for home production and, consequently, output for the foreign market is lower than output for the home market. In addition, we investigate the firm's decision to serve the foreign market by exporting or by engaging in FDI and determine parameter values for which either regime is chosen.International topics; Labour markets; Productivity

The Canadian Debt-Strategy Model: An Overview of the Principal Elements

As part of managing a debt portfolio, debt managers face the challenging task of choosing a strategy that minimizes the cost of debt, subject to limitations on risk. The Bank of Canada provides debt-management analysis and advice to the Government of Canada to assist in this task, with the Canadian debt-strategy model being developed to help in this regard. The authors outline the main elements of the model, which include: cost and risk measures, inflation-linked debt, optimization techniques, the framework used to model the government’s funding requirement, the sensitivity of results to the choice of joint stochastic macroeconomic term-structure model, the effects of shocks to macroeconomic and term-structure variables and changes to their long-term values, and the relationship between issuance yield and issuance amount. Emphasis is placed on the degree to which changes to the formulation of model elements impact key results. The model is an important part of the decision-making process for the determination of the government’s debt strategy. However, it remains one of many tools that are available to debt managers and is to be used in conjunction with the judgment of an experienced debt manager.Debt management; Econometric and statistical methods; Financial markets; Fiscal policy

Darkling beetles (Alphitobius diaperinus) and their larvae as potential vectors for the transfer of Campylobacter jejuni and Salmonella enterica serovar paratyphi B variant Java between successive broiler flocks

Broiler flocks often become infected with Campylobacter and Salmonella, and the exact contamination routes are still not fully understood. Insects like darkling beetles and their larvae may play a role in transfer of the pathogens between consecutive cycles. In this study, several groups of beetles and their larvae were artificially contaminated with a mixture of Salmonella enterica serovar Paratyphi B Variant Java and three C. jejuni strains and kept for different time intervals before they were fed to individually housed chicks. Most inoculated insects were positive for Salmonella and Campylobacter just before they were fed to the chicks. However, Campylobacter could not be isolated from insects that were kept for 1 week before they were used to mimic an empty week between rearing cycles. All broilers fed insects that were inoculated with pathogens on the day of feeding showed colonization with Campylobacter and Salmonella at levels of 50 to 100%. Transfer of both pathogens by groups of insects that were kept for 1 week before feeding to the chicks was also observed, but at lower levels. Naturally contaminated insects that were collected at a commercial broiler farm colonized broilers at low levels as well. In conclusion, the fact that Salmonella and Campylobacter can be transmitted via beetles and their larvae to flocks in successive rearing cycles indicates that there should be intensive control programs for exclusion of these insects from broiler houses

An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates

Zero-coupon interest rates are the fundamental building block of fixed-income mathematics, and as such have an extensive number of applications in both finance and economics. The risk-free government zero-coupon term structure is, however, not directly observable and needs to be generated from the prices of marketable, coupon-bearing bonds. The authors introduce the first public-domain database of constant-maturity zero-coupon yield curves for the Government of Canada bond market. They first outline the mechanics of the curve-fitting algorithm that underlie the model, and then perform some preliminary statistical analysis on the resulting yield curves. The full sample period extends from January 1986 to May 2003; it is broken down into two subsamples, reflecting the structural and macroeconomic changes that impacted the Canadian fixed-income markets over that time. The authors examine the evolution of a number of key interest rates and yield-curve measures over the period, perform a principal-components analysis of the common factors that have influenced yield changes over time, and compare holding-period returns over the sample for assets of various maturities.Financial markets; Interest rates; Econometric and statistical methods

Soziale Brechungen des Zusammenhangs zwischen regionalen Umwelten und individuellen Ausbildungschancen

"Kürzungen im Bereich der Ausbildungsförderung verhindern eine Angleichung der Startchancen von Angehörigen unterschiedlicher sozialer Schichten. Dies wird am Beispiel des Zusammenhangs zwischen den sozialen und wirtschaftlichen Bedingungen unterschiedlicher regionaler Umwelten und den Ergebnissen von Ausbildungsprozessen in verschiedenen Sozialmilieus veranschaulicht. Bei einer quantitativen Längsschnittuntersuchung, die die Entwicklung eines Schülerjahrgangs unter gleichzeitiger Beobachtung der entsprechenden regionalen Entwicklungen erfaßte, wurde deutlich, daß Jugendliche des Arbeitermilieus am stärksten von ungünstigen Bedingungen betroffen werden. Bei ihnen konzentrieren sich verschiedene Faktoren: Die objektiven Gegebenheiten in ihrer sozialen und regionalen Umwelt - z.B. im Bereich der Schulen und Ausbildungsplätze - werden als vorgegebener Entscheidungsrahmen verstanden; dazu kommt die in unterschiedlichen Milieus spezifisch ausgeprägte Einschätzung der Chancen weiterführender Ausbildungswege. Dies führt dazu, daß sich Jugendliche im Arbeitermilieu stärker und früher als andere entmutigt aus den akademischen Bildungswegen zurückzuziehen, wobei aktuelle Engpässe auf dem Arbeitsmarkt für Akademiker zur Verstärkung dieser Einstellungs- und Verhaltensmuster beitragen." (Autorenreferat)Bildungschancen, Individuum, soziale Umwelt