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Are Interest Rate Derivatives Spanned By The Term Structure Of Interest Rates?, Massoud Heidari, Liuren Wu
Are Interest Rate Derivatives Spanned By The Term Structure Of Interest Rates?, Massoud Heidari, Liuren Wu
CRIF Working Paper series
We investigate whether the same finite dimensional dynamic system spans both interest rates (the yield curve) and interest rate options (the implied volatility surface). We find that the options market exhibits factors independent of the underlying yield curve. While three common factors are adequate to capture the systematic movement of the yield curve, we need three additional factors to capture the movement of the implied volatility surface.
Design And Estimation Of Quadratic Term Structure Models, Markus Leippold, Liuren Wu
Design And Estimation Of Quadratic Term Structure Models, Markus Leippold, Liuren Wu
CRIF Working Paper series
We consider the design and estimation of quadratic term structure models. We start with a list of stylized facts on interest rates and interest rate derivatives, classified into three layers: (1) general statistical properties, (2) forecasting relations, and (3) conditional dynamics. We then investigate the implications of each layer of property on model design and strive to establish a mapping between evidence and model structures. We calibrate a two-factor model that approximates these three layers of properties well, and illustrate how the model can be applied to pricing interest rate derivatives.
Real Exchange-Rate Behaviour Under Fixed And Floating Exchange Rate Regimes, James R. Lothian, Cornelia H. Mccarthy
Real Exchange-Rate Behaviour Under Fixed And Floating Exchange Rate Regimes, James R. Lothian, Cornelia H. Mccarthy
CRIF Working Paper series
In this paper we examine the stability of the real exchange rate and the macroeconomic effects of alternative exchange-rate regimes, including currency union, on real exchange-rate behaviour. We focus on the Irish punt in order to exploit its diversity of experience over different nominal exchange rate regimes. We make both temporal and cross-country comparisons of real-exchange-rate stability for the Irish punt with sterling, the US dollar and the German mark. We reach two conclusions on the basis of our results. The first is that for Ireland, as for most other countries, purchasing power parity provides a reasonably good description of …
Equity Returns And Inflation: The Puzzlingly Long Lags, James R. Lothian, Cornelia Mccarthy
Equity Returns And Inflation: The Puzzlingly Long Lags, James R. Lothian, Cornelia Mccarthy
CRIF Working Paper series
This paper examines data for stock prices and price levels of 14 developed countries during the post-WWII era and compares their behavior in that sample with behavior over the past two centuries in the UK and the US. Contrary to much of the literature of the past several decades, we find that nominal equity prices do, in fact, keep pace with movements in the overall price level. Our results suggest, however, that this is only the case over long periods. The puzzle therefore is not that equities fail the test as inflation hedges, as had been quite widely believed, but …
Currency Union And Real Exchange Rate Behavior, James R. Lothian, Cornelia Mccarthy
Currency Union And Real Exchange Rate Behavior, James R. Lothian, Cornelia Mccarthy
CRIF Working Paper series
In this paper we study the behavior of the real exchange rate of three North American currencies vis-a-vis the U.S. dollar: the Canadian dollar the Mexican peso, and the Panamanian Balboa. Our principal object is to design an experiment in which meaningful comparisons of behavior across regimes would be possible. In the main we were unable to find any. The allegation of problems created due to aggregating data across regimes therefore receives no support at all in these data. A second criterion for choosing the countries in our sample was differences in level of economic development. The object here was …