Search results

A joint model of macroeconomic and term structure dynamics is specified and estimated for the euro area. The model comprises a backward-looking Phillips curve, a dynamic IS equation, a monetary policy rule as well as a specification of the dynamics of trend growth and the natural real interest rate. Under the condition of no arbitrage, yields of all maturities are affine functions of the macroeconomic driving forces. With the exception of a shock to potential output growth, the response of short-term yields to macroeconomic shocks is generally stronger than that of long-term yields. Impulse responses of all bond yields are fairly persistent, which reflects the persistence of their macroeconomic driving forces. Across the whole maturity spectrum, about ninety percent of the variation in yields is explained jointly by monetary policy shocks and shocks to the natural real rate of interest; the relative contribution of the latter shock increases with time to maturity. Cost-push shocks explain at most eight percent, while shocks to the output gap play an even less important role.

Starting in summer 2014, markets began to build up expectations that the European Central Bank (ECB) would embark on large-scale sovereign bond purchases. The ECB's Public Sector Purchase Programme (PSPP) was eventually announced on 22 January 2015 and purchases started in March. Both during the run-up phase to the PSPP announcement day and for the day itself, German government bond yields declined significantly. Using an affine term structure model, we evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of the conjecture that the PSPP transmits to long-term yields mainly via a portfolio re-balancing channel rather than a (policy rate) signalling channel. The results prove robust against changing the number of factors in the model, the estimation sample and the estimation approach.

Starting in summer 2014, markets began to build up expectations that the European Central Bank (ECB) would embark on large-scale sovereign bond purchases. The ECB's Public Sector Purchase Programme (PSPP) was eventually announced on 22 January 2015 and purchases started in March. Both during the run-up phase to the PSPP announcement day and for the day itself, German government bond yields declined significantly. Using an affine term structure model, we evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component. This speaks in favour of the conjecture that the PSPP transmits to long-term yields mainly via a portfolio re-balancing channel rather than a (policy rate) signalling channel. The results prove robust against changing the number of factors in the model, the estimation sample and the estimation approach.

As the global banking crisis intensified in the fall of 2008, governments announced comprehensive rescue packages for financial institutions. In this paper, we put the joint response of euro area bank and sovereign CDS premia under the microscope. We find that the bank rescue packages led to a clear structural break in these premia's comovement, which had been rather tight and stable in the weeks preceding the in-tensification of the crisis. Firstly, the packages induced a decrease in risk spreads for banks at the expense of a marked increase in risk spreads for governments. Secondly, we show that in addition to this one-off jump in the levels of CDS spreads, the packages strongly increased the sensitivity of sovereign risk spreads to any further aggravation of the crisis. At the same time, the sensitivity of bank credit risk premia declined and became more sovereign-like, reflecting the extensive government guarantees of banking sector liabilities.

This paper studies a nonlinear one‐factor term structure model in discrete time. The short‐term interest rate follows a self‐exciting threshold autoregressive (SETAR) process that allows for shifts in the intercept and the variance. In comparison with a linear model, we find empirical evidence in favour of the threshold model for Germany and the US. Based on the estimated short‐rate dynamics we derive the implied arbitrage‐free term structure of interest rates. Since analytical solutions are not feasible, bond prices are computed by means of Monte Carlo integration. The resulting term structure captures stylized facts of the data. In particular, it implies a nonlinear relation between long rates and the short rate.

This paper derives analytical solutions for arbitrage-free bond yields when the short-term interest rate follows an autoregressive process with the intercept switching endogenously. This process from the SETAR family is especially suited to capture the near-unit-root behavior typically observed in the evolution of short-term interest rates. The derived yield functions, mapping the one-month rate into n-period yields, exhibit a convex/concave shape to the left and the right of
the threshold value, respectively; a pattern which is also found in US bond yield data. The longer the time to maturity, the more distinct the nonlinearity of the yield function becomes.