Term Structure Anomalies: Term Premium or Peso problem?

The goal of this paper is to develop a test for the relative importance of the time-varying term premium and the peso-problem for rejection of the Expectation Hypothesis of the Term Structure (EHTS). Our reasoning is based on a term structure model that allows for both phenomena simultaneously. If we assume that only one regime is observed ex-post, we can estimate all the information we need to evaluate distortions generated by both hypotheses. We can also test the presence of a peso-problem. Firstly we find that a peso-problem might explain rejection of the EHTS in Germany and the United Kingdom after the European exchange rate crisis. Secondly, we show that this explanation appears inappropriate to explain the EHTS failure in the United States.Expectation theory of the term structure ; Peso problem ; Time varying term premium.

Microstructure of financial and money markets: lessons learned from the conference held in Paris on 6 and 7 June 2006

The characteristics of trade and the efficiency and stability of markets depend on how such markets are organised. Market microstructure, which analyses this linkage, is an area of research that has grown extremely rapidly over the past years. However, progress has essentially been made with regard to financial markets. The few articles devoted to the money market are either descriptive (and most often applied to the case of the United States), or based on data whose frequency is insufficient to capture certain stylised facts. For central banks, it is essential to have a good understanding of the practices and the organisation of financial and money markets, in particular the way in which they respond to monetary policy impulses. From a financial stability perspective, an in-depth understanding of market practices makes it possible to identify new categories of risk, such as short-term risk. In June 2006, the Banque de France organised in partnership with the Center for Research in Economics and Staistics (CREST) and the Europlace Institute of Finance (EIF), a conference on the microstructure of markets, and notably that of money markets. This conference brought together researchers from central banks, French and foreign universities and renowned research centres. Robert Engle (New York University, Nobel prize 2003) and S. “Vish” Viswanathan (Duke University) presented two invited conferences, and Thierry Foucault (HEC Paris), Joël Hasbrouck (New York University) and Suresh Sundaresan (Columbia University and Federal Reserve Bank of New York) participated in the closing roundtable. The discussions spanned a wide variety of topics that have attracted much attention over recent years: risk measures, the quality of financial markets, the structure of financial and money markets, etc.

Euro money market interest rates dynamics and volatility: How they respond to recent changes in the operational framework.

At the beginning of 2004, the Eurosystem implemented several modifications of its operational framework and liquidity management aiming at enhancing market efficiency. The purpose of this article is to study the effects of theses changes in the spread between the Eonia and the minimum bid rate. Our results reflect that both the operational changes as well as the new liquidity management are responsible for a significant decrease in the interest rate volatility.European money market ; Eonia ; Operational framework ; Liquidity effect.

New Information Response Functions.

We propose a new methodology for the analysis of impulse response functions in VAR or VARMA models. More precisely, we build our results on the non ambiguous notion of innovation of a stochastic process and we consider the impact of any kind of new information at a given date $t$ on the future values of the process. This methodology allows to take into account qualitative or quantitative information, either on the innovation or on the future responses, as well as informations on filters. We show, among other results, that our approach encompasses several standard methodologies found in the literature, such as the orthogonalization of shocks (Sims (1980)), the "structural" identification of shocks (Blanchard and Quah (1989)), the "generalized" impulse responses (Pesaran and Shin (1998)) or the impulse vectors (Uhlig (2005)).Impulse response functions ; innovation ; new information.

Taking into account extreme events in European option pricing.

According to traditional option pricing models,1 financial markets underestimate the impact of tail risk. In this article, we put forward a European option pricing model based on a set of assumptions that ensure, inter alia, that extreme events are better taken into account. Using simulations, we compare the option prices obtained from the standard Black and Scholes model with those resulting from our model. We show that the traditional model leads to an overvaluation of at-the-money options, which are the most traded options, while the less liquid in-the-money and out-of-the-money options are undervalued.

Macro stress testing with a macroeconomic credit risk model: Application to the French manufacturing sector.

The aim of this paper is to build and estimate a macroeconomic model of credit risk for the French manufacturing sector. This model is based on Wilson's CreditPortfolioView model (1997a, 1997b); it enables us to simulate loss distributions for a credit portfolio for several macroeconomic scenarios. We implement two simulation procedures based on two assumptions relative to probabilities of default (PDs): in the first procedure, firms are assumed to have identical default probabilities; in the second, individual risk is taken into account. The empirical results indicate that these simulation procedures lead to quite different loss distributions. For instance, a negative one standard deviation shock on output leads to a maximum loss of 3.07% of the financial debt of the French manufacturing sector, with a probability of 99%, under the identical default probability hypothesis versus 2.61% with individual default probabilities.macro stress test ; credit risk model ; loss distribution.

Determinants of long-term interest rates in the United States and the euro area: A multivariate approach.

This article looks at the factors explaining the level of US and European long-term interest rates between 1986 and 2005. We begin by selecting the structural determinants of long-term interest rates, dealing with the US and European cases separately. However, a univariate framework cannot capture market integration and suffers from a number of statistical limitations. Switching to a multivariate setting reveals spillover from US to euro area long-term yields, with no reciprocal effect. The model allows us to draw up a timeline of events affecting the level of US and European long-term interest rates. Accordingly, the bursting of the internet bubble, purchases by foreign agents, both official and private, and the increase in global liquidity all seemingly exerted downward pressure on US long-term interest rates and, indirectly, on euro area long rates.Long term interest rates ; Conundrum, Multivariate model.

The fecal microbiota of piglets during weaning transition and its association with piglet growth across various farm environments

This study describes the fecal microbiota from piglets reared in different living environments during the weaning transition, and presents the characteristics of microbiota associated with good growth of piglets after weaning. Fecal samples were collected pre- (d26) and post-weaning (d35) from 288 male piglets in 16 conventional indoor commercial farms located in the West of France. The changes one week after weaning on the most abundant microbial families was roughly the same in all farms: alpha diversity increased, the relative abundance of Bacteroidaceae (-61%), Christensenellaceae (-35%), Enterobacteriaceae (-42%), and Clostridiaceae (-32%) decreased, while the relative abundance of Prevotellaceae (+143%) and Lachnospiraceae (+21%) increased. Among all the collected samples, four enterotypes that were ubiquitous in all farms were identified. They could be discriminated by their respective relative abundances of Prevotella, Faecalibacterium, Roseburia, and Lachnospira, and likely corresponded to a gradual maturational shift from pre- to post-weaning microbiota. The rearing environment influenced the frequency of enterotypes, as well as the relative abundance of 6 families at d26 (including Christensenellaceae and Lactobacillaceae), and of 21 families at d35. In all farms, piglets showing the highest relative growth rate during the first three weeks after weaning, which were characterized as more robust, had a higher relative abundance of Bacteroidetes, a lower relative abundance of Proteobacteria, and showed a greater increase in Prevotella, Coprococcus, and Lachnospira in the post-weaning period. This study revealed the presence of ubiquitous enterotypes among the farms of this study, reflecting maturational stages of microbiota from a young suckling to an older cereal-eating profile. Despite significant variation in the microbial profile between farms, piglets whose growth after weaning was less disrupted were, those who had reached the more mature phenotype characterized by Prevotella the fastest