20 research outputs found
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The Predictability of Excess Returns on UK Bonds: a Non-Linear Approach
This paper provides an empirical description of the behaviour of excess returns on UK government discount bonds in
terms of risk factors such as the forward premium, the slope of the term structure, dividend yields and excess stock
returns. We identify the existence of a time-varying term structure of expected excess returns. Further, the dynamics
of the expected returns are characterised by regime-switching behaviour where the transition from one regime to the
other is controlled by the slope of the term structure of interest rates. The first regime, which is characterised by flat
or downward sloping term structures, occurs during periods of economic recession. The second regime, which is
characterised by upward sloping term structures, occurs during periods of economic expansion. The main risk factors
explaining expected returns are the slope of the term structure in the recessionary regime and the excess stock returns
in the expansionary regime
Common risk factors in the US and UK interest swap markets-evidence from a non-linear vector autoregression approach
This paper produces evidence in support of the existence of common risk factors in the US and
UK interest rate swap markets. Using a multivariate smooth transition autoregression (STVAR)
framework, we show that the dynamics of the US and UK swap spreads are best described by a
regime-switching model. We identify the existence of two distinct regimes in US and UK swap
spreads; one characterized by a "flat" term structure of US interest rates and the other
characterized by an "upward" slopping US term structure. In addition, we show that there exist
significant asymmetries on the impact of the common risk factors on the US and UK swap
spreads. Shocks to UK oriented risk factors have a strong effect on the US swap markets during
the "flat" slope regime but a very limited effect otherwise. On the other hand, US risk factors
have a significant impact on the UK swap markets in both regimes. Despite their added
flexibility, the STVAR models do not consistently produce superior forecasts compared to less
sophisticated autoregressive (AR) and vector autoregressive (VAR) models
Linear Predictability vs. Bull and Bear Market Models in Strategic Asset Allocation Decisions: Evidence from UK Data
An analysis of the relationship between international bond markets
SIGLEAvailable from British Library Document Supply Centre-DSC:9350.8308(no 123) / BLDSC - British Library Document Supply CentreGBUnited Kingdo
EXACT FORMULAS FOR PRICING BONDS AND OPTIONS WHEN INTEREST RATE DIFFUSIONS CONTAIN JUMPS
I develop Heath-Jarrow-Morton extensions of the Vasicek and Jamshidian pure-diffusion models, extend these models to incorporate Poisson-Gaussian interest rate jumps, and obtain closed-form models for valuing default-free, zero-coupon bonds and European call and put options on default-free, zero-coupon bonds in a market where interest rates can experience discontinuous information shocks. The jump-diffusion pricing models value the instrument as the probability-weighted average of the pure-diffusion model prices, each conditional on a specific number of jumps occurring during the life of the instrument. I extend the models to coupon-bearing instruments by applying Jamshidian's serial-decomposition technique. 2005 The Southern Finance Association and the Southwestern Finance Association.