A Summary of the Bank of Canada Conference on Fixed-Income Markets, 3-4 May 2006

The Bank of Canada's interest in fixed-income markets spans several of its functional areas of responsibility, including monetary policy, funds management, and financial system stability and efficiency. For that reason, the 2006 conference brought together top academics and central bankers from around the world to discuss leading-edge work in the field of fixed-income research. The papers and discussions cover such topics as the efficiency of fixed-income markets, price formation, the determinants of the yield curve, and volatility modelling. This article provides a short summary of each conference paper and the ensuing discussion.

Multivariate Realized Stock Market Volatility

We present a new matrix-logarithm model of the realized covariance matrix of stock returns. The model uses latent factors which are functions of both lagged volatility and returns. The model has several advantages: it is parsimonious; it does not require imposing parameter restrictions; and, it results in a positive-definite covariance matrix. We apply the model to the covariance matrix of size-sorted stock returns and find that two factors are sufficient to capture most of the dynamics. We also introduce a new method to track an index using our model of the realized volatility covariance matrix.Econometric and statistical methods; Financial markets

The Monetary Origins of Asymmetric Information in International Equity Markets

Existing studies using low-frequency data show that macroeconomic shocks contribute little to international stock market covariation. Those studies, however, do not account for the presence of asymmetric information, where sophisticated investors generate private information about the fundamentals that drive returns in many countries. In this paper, the authors use a new microstructure data set to better identify the effects of private and public information shocks about U.S. interest rates and equity returns. High-frequency private and public information shocks help forecast domestic money and equity returns over daily and weekly intervals. In addition, these shocks are components of factors that are priced in a model of the cross-section of international returns. Linking private information to U.S. macroeconomic factors is useful for many domestic and international asset-pricing tests.Financial markets; International topics; Market structure and pricing

International Equity Flows and Returns: A Quantitative Equilibrium Approach

The authors model trading by foreign and domestic investors in developed-country equity markets. The key assumptions are that (i) both the foreign and domestic investor populations contain investors of different sophistication, and (ii) investor sophistication matters for performance in both public equity and private off-market investments. A quantitative model with these assumptions delivers a unified explanation for three stylized facts about U.S. investors’ international equity trades that have been documented in the literature: (i) trading by U.S. investors occurs in bursts of simultaneous buying and selling, (ii) Americans build and unwind foreign equity positions gradually, and (iii) U.S. investors increase their market share in a country when stock prices in that country have recently been rising.Financial markets; International topics; Market structure and pricing

International equity flows and returns: a quantitative equilibrium approach

This paper considers the role of foreign investors in developed-country equity markets. It presents a quantitative model of trading that is built around two new assumptions: (i) both the foreign and domestic investor populations contain investors of different sophistication, and (ii) investor sophistication matters for performance in both public equity and private investment opportunities. The model delivers a unified explanation for three stylized facts about US investors’ international equity trades: (i ) trading by US investors occurs in bursts of simultaneous buying and selling, (ii ) Americans build and unwind foreign equity positions gradually and (iii ) US investors increase their market share in a country when stock prices there have recently been rising. The results suggest that heterogeneity within the foreign investor population is much more important than heterogeneity of investors across countries.Asymmetric information, heterogenous investors, asset pricing, international equity flows, international equity returns

An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks

We construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate. We show that it is important to impose restrictions (including global asset pricing, carry trade fundamentals and maximal Sharpe ratios) on the prices of risk to obtain plausible decompositions of forward curves. The forecasts of interest rates and exchange rates from the restricted model match those from international survey data. Unspanned macroeconomic variables are important drivers of international term and foreign exchange risk premia as well as expected exchange rate changes.Asset Pricing; Exchange rates; Interest rates

Soft-pulse dynamical decoupling in a cavity

Dynamical decoupling is a coherent control technique where the intrinsic and extrinsic couplings of a quantum system are effectively averaged out by application of specially designed driving fields (refocusing pulse sequences). This entails pumping energy into the system, which can be especially dangerous when it has sharp spectral features like a cavity mode close to resonance. In this work we show that such an effect can be avoided with properly constructed refocusing sequences. To this end we construct the average Hamiltonian expansion for the system evolution operator associated with a single ``soft'' pi-pulse. To second order in the pulse duration, we characterize a symmetric pulse shape by three parameters, two of which can be turned to zero by shaping. We express the effective Hamiltonians for several pulse sequences in terms of these parameters, and use the results to analyze the structure of error operators for controlled Jaynes-Cummings Hamiltonian. When errors are cancelled to second order, numerical simulations show excellent qubit fidelity with strongly-suppressed oscillator heating.Comment: 9pages, 5eps figure

Path integral Monte Carlo simulation of helium at negative pressures

Path integral Monte Carlo (PIMC) simulations of liquid helium at negative pressure have been carried out for a temperature range from the critical temperature to below the superfluid transition. We have calculated the temperature dependence of the spinodal line as well as the pressure dependence of the isothermal sound velocity in the region of the spinodal. We discuss the slope of the superfluid transition line and the shape of the dispersion curve at negative pressures.Comment: 6 pages, 7 figures, submitted to Physical Review B Revised: new reference, replaced figure

A review of predictability studies of the Atlantic sector climate on decadal time-scales

This review paper discusses the physical basis and the potential for decadal climate predictability over the Atlantic and its adjacent land areas. Many observational and modeling studies describe pronounced decadal and multidecadal variability in the Atlantic Ocean. However, it still needs to be quantified to which extent the variations in the ocean drive variations in the atmosphere and over land. In particular, although a clear impact of the Tropics on the midlatitudes has been demonstrated, it is unclear if and how the extratropical atmosphere responds to midlatitudinal sea surface temperature anomalies. Although the mechanisms behind the decadal to multidecadal variability in the Atlantic sector are still controversial, there is some consensus that some of the longer-term multidecadal variability is driven by variations in the thermohaline circulation. The variations in the North Atlantic thermohaline circulation appear to be predictable one to two decades ahead, as shown by a number of perfect model predictability experiments. The next few decades will be dominated by these multidecadal variations, although the effects of anthropogenic climate change are likely to introduce trends. Some impact of the variations of the thermohaline circulation on the atmosphere has been demonstrated in some studies so that useful decadal predictions with economic benefit may be possible

Structure and mechanism of human DNA polymerase η

The variant form of the human syndrome xeroderma pigmentosum (XPV) is caused by a deficiency in DNA polymerase eta (Pol eta), a DNA polymerase that enables replication through ultraviolet-induced pyrimidine dimers. Here we report high-resolution crystal structures of human Pol eta at four consecutive steps during DNA synthesis through cis-syn cyclobutane thymine dimers. Pol eta acts like a 'molecular splint' to stabilize damaged DNA in a normal B-form conformation. An enlarged active site accommodates the thymine dimer with excellent stereochemistry for two-metal ion catalysis. Two residues conserved among Pol eta orthologues form specific hydrogen bonds with the lesion and the incoming nucleotide to assist translesion synthesis. On the basis of the structures, eight Pol eta missense mutations causing XPV can be rationalized as undermining the molecular splint or perturbing the active-site alignment. The structures also provide an insight into the role of Pol eta in replicating through D loop and DNA fragile sites