bond liquidity premia recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries in the us the repo market is the key funding market then the premium of on the run u s treasury bonds should share a common component with risk premia in other markets

a comparison of the information in the libor and cmt term structures of interest rates abstract we investigate the information contained in the london interbank offered rate libor and the u s constant maturity treasury cmt term structure of interest rates and report three novel findings first we document that the information contained in term structures are significantly different from one another second we provide evidence of a significant change in the nature of this difference as the financial crisis began third we find that the significant changes in the information content of cmt and libor are consistent with significant shocks to credit default swap rates and tenor swap rates

interest rate swaps abstract using quotations from two interest rate swap dealers with different credit ratings aaa and a we examine the effect of dealers credit reputations on swap quotations and bid offer spreads the aaa offer rates are significantly higher than the a offer rates and the aaa bid rates are significantly lower than the a bid rates we also document the relation between swap rates and par bond yields estimated from london interbank offered rate libor and bid rate libid data we identify some of the problems in testing the implications of swap pricing theory

an empirical study of tax audits in china on international transfer pricing abstract this research studies how chinese tax authorities implement international transfer pricing legislation the analysis indicates that tax audits on transfer pricing are confined mainly to medium and small sized foreign investments lower technology companies and transfer of tangible goods and tend to focus on certain nationality and forms of foreign investment persistent losses low profitability and lack of local partners in joint venture management most often trigger tax audits the authorities focus on profit results rather than prices and often use comparable profit method to adjust income tax differentials do not appear to be the most important inducement to transfer pricing manipulations

the term structure of interest rates in a partially observable economy this paper investigates the term structure of interest rates in a multiperiod production and exchange economy with incomplete information unable to observe their stochastic investment opportunities investors engage in dynamic bayesian inference this results in the endogenous identification of a more complex production function which generates a richer term structure resembling the one that actual market prices imply in addition this paper introduces a characteristic function of the term structure and demonstrates that in contrast with a fully observable economy the widely investigated expectations hypothesis holds true only if interest rates are nonstochastic this paper investigates the term structure of interest rates in a dynamic production and exchange economy with an unobservable productivity factor in order to estimate the unobservable stochastic investment opportunities rational investors engage in dynamic bayesian inference anticipated changes in investors quality of information about the fluctuations of the economic state variable affect equilibrium demands and prices this results in the endogenous identification of a more complex production function which induces a richer term structure term structures of interest rates in a partially observable economy resemble term structure curves that actual market prices imply this paper also introduces a characteristic function of the term structure and demonstrates that in contrast with a fully observable economy the widely investigated expectations

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

yield spreads as predictors of industrial production expectations on short rates or term premia this paper reconsiders information in the us t bill term structure for predicting movements in real monthly industrial production it is shown that although t bill spreads contain little or no predictive content increases in term premia estimated from a garch m model of the term structure do since these estimated premia are linear functions of the conditional variance of excess returns the implication is that increases in interest rate variability are associated with reductions in industrial production this evidence is robust to the inclusion of the spread between the 10 year tbond yield and one month t bill yields the t bill term structure therefore contains information which is independent of the long end of the term structure

the monotonicity of the term premium another look this paper reexamines existing evidence regarding the monotonicity of the term premium using a recently developed approach for testing inequality constraints we propose and conduct tests for whether the term premium is monotonic and reach different conclusions from those implied by individual t statistics on term premiums even under a bonferroni type adjustment our results generally support mcculloch s 1987 view that the liquidity preference hypothesis remains unrefuted

cyclical demand and the choice of debt maturity this study provides a model in which a supplier s use of short and long term debt depends on the demand for its product the model predicts that suppliers use short term debt to match their assets and liabilities maturities and that their incentive to do so is stronger the larger the term premium the model also predicts that the use of short term debt increases the amplitudes of the supplier s investment production and sales cycles these changes occur because the use of short term debt permits suppliers to match production and sales more closely to the pattern of demand for the final good

anomalies in intertemporal choice evidence and an interpretation research on decision making under uncertainly has been strongly influenced by the documentation of numerous expected utility eu anomalies behaviors that violate the expected utility axioms the relative lack of progress on the closely related topic of intertemporal choice is partly due to the absence of an analogous set of discounted utility du anomalies we enumerate a set of du anomalies analogous to the eu anomalies and propose a model that accounts for the anomalies as well as other intertemporal choice phenomena incompatible with du we discuss implications for savings behavior estimation of discount rates and choice framing effects

transfer pricing determinants of u s multinationals this paper examines the influence of environmental and firm specific variables on the selection of international transfer pricing strategies the primary data were obtained from 164 multinational enterprises by means of a questionnaire responses were analyzed by performing factor analysis and constructing a probit model the findings suggest that legal constraints and firm size are significant determinants in the selection of international transfer pricing strategies by u s multinationals

information production and the term structure the difference between the forward rate of interest implicit in the term structure of interest rates and the expected future spot rate is usually referred to as a liquidity premium this paper examines the determinants of the liquidity premiums implicit in the term structure of real interest rates using a three date economy with production the sign of the liquidity premium is characterized in terms of the parameters that describe the uncertainty in the economy the results suggest that the liquidity premiums implicit in the real term structure of interest rates may sometimes be negative

an empirical analysis of term premiums using stochastic dominance abstract this paper examines term premiums in u s treasury bill monthly holding period returns several techniques are employed to ascertain whether the observed term premiums are economically meaningful no second order stochastic dominance is found in the first five month maturities when a riskless asset is assumed the first two maturities are dominated therefore we conclude that although there are statistically significant term premiums they are not economically meaningful if there is no riskless borrowing and lending the term premiums are economically meaningful in the sense that the longer maturities dominate the shorter maturities when a riskless asset is available

a nonlinear general equilibrium model of the term structure of interest rates abstract we derive and test an alternative closed form general equilibrium model of the term structure within the cox ingersoll and ross theoretical framework in which yields are nonlinear functions of the risk free rate we show that equilibrium bond prices and the risk free rate are not always inversely related and that bond risk need not be strictly increasing in maturity using hansen s generalized method of moments to obtain parameter estimates this nonlinear model outperforms the cox ingersoll and ross square root model in describing actual treasury bill yields for the 1964 1986 period

tax induced bias in forward rates term premiums and the term structure of interest rates abstract this paper s analysis on the tax induced bias in forward rates enables us to better understand the structure of term premiums and the term structure of interest rates and to obtain a better estimate of the future interest rate in particular the anomaly of negative term premiums regarding long maturities as reported by fama 1984 is resolved

the impact of environmental policy instruments on innovation a review of energy and automotive industry studies various types of policy instruments have been implemented to reduce local and global emissions but the impact on innovation of different instruments has received less attention this paper reviews empirical studies of the innovation impact of four main types of policy instruments in two high emitting sectors the conclusions are threefold 1 policy plays a key role for the development and diffusion of environmental innovation in the studied sectors 2 different types of instruments promote different types of innovations general economic instruments has primarily encouraged incremental innovation general regulatory instruments has enforced improvements based on modular innovation and technology specific instruments appears to have been needed to support the development and deployment of radically new technologies 3 all types of policy instruments face challenges in design and implementation understanding the selection impact of the chosen instruments implementing increasing stringency levels committing to an appropriate scale and safeguarding policy stability

japan s financial deregulation and linkage of the gensaki and euroyen deposit markets summary this paper examines whether japan s financial deregulation weakened the linkage between the euroyen and gensaki markets it defines and analyses the linkage of the two markets in terms of the persistence and predictability of yield spreads as well as cross market causality by using johansen tests and an error correction model this paper shows first cross market causality before and after deregulation and second one common trend in interest rates substantial gensaki euroyen yield spreads and a slower response of the one month gensaki euroyen yield spread to a shock after deregulation

international corporate taxation and u s multinationals behaviour an integrated approach this paper explores the effects of corporate taxation on u s capital invested abroad and on tax planning practices the econometric analysis first indicates that investment is strongly influenced by average tax rates with a magnified impact particularly for low tax rates implying that the attractiveness of low tax countries is not weakened by anti deferral rules and cross crediting limitations further explorations suggest that firms report higher profit higher subpart f income and are less likely to repatriate dividends when they are located in low tax jurisdictions finally when the role of effective transfer pricing regulations is estimated it appears that low degrees of law enforcement are associated with higher income shifting ce memoire s interesse aux effets des impots sur le revenu des societes sur l investissement et les pratiques de planifications fiscales des firmes multinationales americaines l analyse econometrique indique que l investissement americain est fortement influence par le taux d imposition moyen et que cet impact est sensiblement plus important pour de faibles taux d imposition ceci suggere que l attractivite des pays a faible imposition n est pas affaiblie par les limites imposees par le systeme fiscal americain sur la possibilite de differer l impot et sur les moyennes de credit des tests additionnels montrent que les firmes reportent un profit ainsi qu un revenu subpart f plus important et rapatrient moins leurs dividendes lorsqu elles sont localisees dans des pays a faible imposition finalement en estimant le role joue par l efficacite des reglementations en termes de prix de transferts il apparait qu un faible etat de droit est associea de plus fortes manipulations fiscales

the taxing task of taxing transnationals financial and real investment flexibility tax competition and superior economic information by transnationals both create a rationale for corporate income taxation and limit the effectiveness of such taxation while these factors have led to a variety of transnational tax policies such as deferral double taxation apportionment and trade rules very few of these institutional features have been integrated into tax competition and agency models in this paper i show how the integration of investment flexibility tax competition and agency issues is crucial to our understanding of corporate tax policies

do stationary risk premia explain it all evidence from the term structure abstract predictable variations in excess returns have often been attributed to the presence of time varying risk premia in this paper we use an insight based upon new techniques from time series analysis to test whether stationary risk premia can alone explain the behavior of excess returns to long bonds relative to rolling over short rates surprisingly we reject this hypothesis using u s t bill returns we then show that either permanent shocks to the risk premia and or rationally anticipated shifts in the interest rate process could produce anomalous results

the empirical implications of the cox ingersoll ross theory of the term structure of interest rates the one factor version of the cox ingersoll and ross model of the term structure is estimated using monthly quotes on u s treasury issues trading from 1952 through 1983 using data from a single yield curve it is possible to estimate implied short and long term zero coupon rates and the implied variance of changes in short rates analysis of residuals points to a probable neglected tax effect the term structure of interest rates is important to economists because the relationship among the yields on default free securities that differ in their term to maturity reflects the information available to the market about the future course of events the expectations hypothesis the liquidity preference hypothesis hicks 10 and the market segmentation hypothesis culbertson 6 are theories of the term structure that predict little more than that the implied forward rate is either equal to or not equal to the expectation of future spot rates cox ingersoll and ross 5 cir model the term structure of interest rates in a competitive equilibrium context their model has elements in common with the earlier hypotheses of the term structure however the cir model has a rich class of empirical implications not only for the pricing of default free securities but also for the pricing of bond options callable bonds and other types of financial claims this paper examines the extent to which the model in its simplest one factor form is descriptive of the prices of u s treasury bills bonds and notes traded from 1952 to 1983 section i describes the model and the parsimonious representation of bond prices which it implies section ii describes the data and section iii outlines the preliminary results obtained by fitting the model to observed data the final section outlines directions for future research

was china the first domino assessing links between china and other asian economies abstract several commentators have suggested that competition from china in particular its 1994 devaluation and strong export performance during 1994 95 may have contributed to the asian crisis of 1997 98 we provide evidence against this view we show that the devaluation was not important in economic terms and china s strong export performance in 1994 95 was matched by other asian economies we also show that the period 1993 and 1996 was marked by relative stability in the export shares of china and other asian economies in various geographical regions and industries the paper concludes by outlining channels through which the asian crisis could affect china

inflation bets on the long bond the liquidity premium theory of interest rates predicts that the treasury yield curve steepens with inflation uncertainty as investors demand larger risk premiums to hold long term bonds by using the dispersion of inflation forecasts to measure this uncertainty we find the opposite since the prices of long term bonds move more with inflation than short term ones investors also disagree and speculate more about long maturity payoffs with greater uncertainty shorting frictions measured by using treasury lending fees then lead long maturities to become overpriced and the yield curve to flatten we estimate this inflation betting effect using time variation in inflation disagreement and treasury supply

regulatory reforms and productivity an empirical analysis of the japanese electricity industry the japanese electricity industry has experienced regulatory reforms since the mid 1990s this article measures productivity in japan s steam power generation sector and examines the effect of reforms on the productivity of this industry over the period 1978 2003 we estimate the luenberger productivity indicator which is a generalization of the commonly used malmquist productivity index using a data envelopment analysis approach factors associated with productivity change are investigated through dynamic generalized method of moments gmm estimation of panel data our empirical analysis shows that the regulatory reforms have contributed to productivity growth in the steam power generation sector in japan

reported trade figure discrepancy regulatory arbitrage and round tripping evidence from the china hong kong trade data this study uses reported trade figures from china and hong kong to examine the relationships among market impediments trade figure irregularities and tax induced regulatory arbitrage the empirical findings consistent with our tax induced regulatory arbitrage models and the round tripping phenomenon in china that is moving funds across the mainland chinese border through trade typically to hong kong or an offshore tax haven before re entering china as foreign direct investment provide support for several conclusions first the spurious flows of funds to and from china via the underreporting of exports and the overreporting of imports closely follow the preferential tax incentives accorded to foreign investors second the underreporting of exports is negatively related to export tax rebates third the overreporting of imports is negatively related to import tariffs finally both of these two appear to be most prevalent in state owned enterprises

nonlinear mean reversion in the term structure of interest rates abstract the expectations hypothesis implies that the yield curve provides information on the future change in the short term interest rate however transaction costs exist in the financial market which prevent investors from realizing the arbitrage opportunity when the arbitrage does not fully cover the transaction costs the purpose of this paper is to assess the effect of transaction costs on the predictability of the term structure by using the threshold vector error correction model which allows for the nonlinear adjustment to the long run equilibrium relationship a significant amount of threshold effect is found and the adjustment coefficients are regime dependent the empirical result supports the nonlinear mean reversion in the term structure of interest rates

an empirical analysis of term premiums using significance tests for stochastic dominance abstract the economic significance of term premiums in real returns on us treasury bills is examined using recently developed tests for first and second order stochastic dominance the tests place only general restrictions on the preferences of individuals and on the distribution of returns the results indicate that the two month real return is preferred to the one month real return based on both dominance criteria other term premiums do not appear to be economically significant

non linearities and nominal contracting effects the case of the depreciation tax shield abstract this paper shows that the effect of nominal contracting on stock returns may be more important than previously believed when information on the maturity structure of depreciation tax shields is incorporated into tests of the nominal contracting hypothesis nominal contracting effects that are not otherwise detectable become so additionally the proportion of stock return variation explained by nominal contracting effects and the aggregate effect on stock returns of depreciation tax shield revaluations are found to be greater than previously believed

nonparametric modeling of u s interest rate term structure dynamics and implications on the prices of derivative securities this paper develops a nonparametric model of interest rate term structure dynamics based on a spot rate process that permits only positive interest rates and a market price of interest rate risk that precludes arbitrage opportunities both the spot rate process and the mar ket price of interest rate risk are nonparametrically specified so that the model allows for maximal flexibility in fitting into the data marginal density of interest rates and historical term structure data are exploited to provide robust estimation of the nonparametric term structure model the model is implemented using u s data and the estimation results are compared to those in the available literature empirical results not only provide strong evidence that most traditional spot rate models and market prices of interest rate risk are misspecified but also confirm that the nonparametric model generates significantly differ ent term structures and prices of common derivatives

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

a test of the cox ingersoll and ross model of the term structure we test the theory of the term structure of indexed bond prices due to cox ingersoll and ross cir the econometric method uses hansen s generalized method of moments and exploits the probability distribution of the single state variable in cir s model thus avoiding the use of aggregate consumption data it enables us to estimate a continuous time model based on discretely sampled data the tests indicate that cir s model for index bonds performs reasonably well when confronted with short term treasury bill returns the estimates indicate that term premiums are positive and that yield curves can take several shapes however the fitted model does poorly in explaining the serial correlation in real treasury bill returns article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

pricing term structure risk in futures markets one period expected returns on futures contracts with different maturities differ because of risk premia in the spreads between futures and spot prices we analyze the expected returns for futures contracts with different maturities using the information that is present in the current term structure of futures prices a simple affine one factor model that implies a constant covariance between the pricing kernel and the cost of carry cannot be rejected for heating oil and german mark futures contracts for gold and soybean futures the risk premia depend on the slope of the current term structure of futures prices while for live cattle futures the evidence is mixed

time varying term premia on u s treasury bills and bonds abstract we use instrumental variables estimation to document variation in ex ante term premia on u s treasury bills and bonds of maturities ranging from two months to twenty years for the april 1959 to december 1989 sample period ex ante term premia are found to be positively related to the ex ante variability in the nominal one month risk free rate of interest significant shifts in the stochastic process generating term premia are documented subsequent to the october 1979 and october 1982 shifts in monetary policy subperiod results document variation in ex ante tenn premia in each of the three monetary regimes

the effect of within sector upstream and downstream energy taxes on innovation and productivity the aim of this paper is to investigate the effect of environmental regulatory stringency on innovation and productivity using a panel of 8 european countries for 13 manufacturing sectors over the years 2001 2007 this research topic falls under the heading of the porter hypothesis ph of which different versions have been tested we consider both the strong and the weak versions of the ph while also adding some peculiar features to the analysis firstly we assess the role played by environmental taxes that is an instrument rarely tested as a factor which can support the ph secondly we analyse not only the effect of environmental taxes within a given sector within sector but also the role played by environmental taxes in upstream and downstream sectors in terms of input output relationships thirdly we test these relationships also indirectly by verifying whether innovation is one of the channels through which higher sectoral productivity can be achieved by imposing tighter environmental regulations our main findings suggest that downstream stringency is the most relevant driver of innovation and productivity while within sector regulations only affect productivity but not innovation moreover the effect of regulations on productivity is mostly direct while the part of the effect mediated by induced innovations as measured by patents is relevant only for what concerns downstream regulations

consumption volatility production volatility spot rate volatility and the returns on treasury bills and bonds abstract the study documents a relation between the expected holding period premiums on treasury bills and the ex ante conditional volatilities of consumption spot one month interest rate and industrial production a model portraying the relation as a risk and return phenomenon is presented and tested consistent with the model the coefficients of the relation appear to depend on the sensitivity of the realized premium to the ex post shocks in consumption industrial production and the spot rate the model fits the data better than the traditional term premium models

asymmetry in government bond returns is there asymmetry in the distribution of government bond returns in developed countries can asymmetries be predicted using financial and macroeconomic variables to answer the first question we provide evidence for asymmetry in government bond returns in particular for short maturities this finding has important implications for modeling and forecasting government bond returns for example widely used models for yield curve analysis such as the affine term structure model assume symmetrically distributed innovations to answer the second question we find that liquidity in government bond markets predicts the coefficient of skewness with a positive sign meaning that the probability of a large and negative excess return is more likely in a less liquid market in addition a positive realized return is associated with a negative coefficient of skewness or a small probability of a large and negative return in the future

term premiums and the integration of the eurocurrency markets abstract this paper provides comparative evidence on the time variation of expected returns across the term of eurocurrency markets first it is shown that forward spot spreads contain substanial information about future changed in 1 month to 5 year rates both in the eurodollar and eurodm markets next a latent variable model is constructed with different benchmark portfolios across currencies integration implies that the time variation of the benchmark portfolios must be the same across currencies little evidence is found against integration of the eurocurrency markets jel g15 g12

new hope for the expectations hypothesis of the term structure of interest rates survey data on interest rate expectations permit separate testing of the two alternative hypotheses in traditional term structure tests that the expectations hypothesis fails and that expected future interest rates are ex post inefficient forecasts we find that the source of the spread s poor predictions of future interest rates varies with maturity at short maturities the expectations hypothesis fails at long maturities however changes in the yield curve reflect changes in expected future rates one for one an implication of the expectations hypothesis this result confirms earlier findings that long rates underreact to short rates but now it cannot be attributed to term premia if the attractiveness of an economic hypothesis is measured by the number of papers which statistically reject it the expectations theory of the term structure is a knockout most tests beginning with macaulay 1938 find no evidence supporting the expectations hypothesis 1 many cannot even reject statistically the alternative hypothesis that the spread between long and short rates contains no information about future interest rate changes 2 to make matters worse in u s postwar data future long rates tend to rise when short rates are above long rates since the expectations hypothesis would predict that long rates tend to fall the theory often does worse than even the naive model that future interest

bond returns liquidity and missing data this paper examines holding period returns to constant duration portfolios of u s govern ment notes and bonds and measures the return premium generated by liquidity differences in bonds the approach compares constant duration portfolios constructed in two distinct ways one using only bonds issued in the most recent treasury auction one using all other bonds comparisons of the resulting series are made meaningful by choosing narrow du ration ranges in the portfolio formation procedure this in turn induces a missing data problem in the created time series parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data it is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments

heterogeneous impacts of regulatory policy stringency on the eu electricity industry a bayesian shrinkage dynamic analysis abstract environmental and technical efficiency in the electricity sector is a major focus of regulatory policies aimed at hastening greenhouse gas reduction and lowering energy prices for final consumers understanding the impact of market and environmental regulations on efficiency is crucial for the design and choice of policy packages at the national level the productivity response to regulations depends on unobserved country specific factors that current empirical analyses have not modelled in this framework we analyse the regulation effects on efficiency in the electricity sector for a panel of european union countries we explicitly consider the effects of the environmental regulation along with the market regulation our estimation strategy uses the bayesian shrinkage estimator which can deal with the bias aggregation problem and cross country heterogeneity it allows us to identify the different transmission channels through which regulatory policy is implemented the results highlight divergent behaviours at the country level the direct impacts of the market and environmental regulatory policies on productivity are negative around 2 7 and 2 3 respectively but the countries vary in the degree to which they are able to compensate these negative effects

expectation puzzles time varying risk premia and dynamic models of the term structure abstract linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory this paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models specifically we match all the key empirical findings reported by fama and bliss 1987 american economic review 77 4 680 692 and campbell and shiller 1991 review of economic studies 58 495 514 among others within large subclasses of affine and quadratic gaussian term structure models additionally we show that certain risk premium adjusted projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly and not only through factor volatilities the risk premiums have a simple form consistent with fama s findings on the predictability of forward rates and are also shown to be consistent with interest rate feedback rules used by a monetary authority in setting monetary policy

multinational firms heterogeneity in tax responsiveness the role of transfer pricing in this paper we show that the ability of multinational firms to manipulate transfer prices affects the tax sensitivity of foreign direct investment fdi we offer a model of international capital allocation where firms are heterogeneous in their ability to manipulate transfer prices perhaps paradoxically we show that the ability to shift profits can make parent companies investment more sensitive to host country tax rates as long as investors expect fiscal authorities to use price and profit detection methods we then offer a comprehensive empirical study to test our predictions in the case of japanese fdi we exploit the finding that the unobservable ability to manipulate transfer prices is correlated with whole ownership of affiliates and r d expenditure based on country parent firm and sector characteristics we estimate an investment equation on a sample of 3 614 japanese affiliates in 49 emerging countries we obtain a greater semi elasticity of investment to the statutory tax rate in affiliates that are wholly owned and that have r d intensive parents we interpret these results as indirect evidence that abusive transfer pricing is one of the determinants of fdi activity

fiscal policy and the term structure abstract this paper investigates the empirical association between deficits in interest rates it extends the results in plosser 1982 to include the more recent experience the association between a measure of ex ante real rates and deficits is also considered the results largely corroborate the previous results first little or no association between real or nominal interest rates and deficits is found second output and to a lesser extent military spending are found to have a significant association with interest rates

the term structure of very short term rates new evidence for the expectations hypothesis abstract empirical researchers have frequently rejected the expectations hypothesis the expectations hypothesis however has seldom if ever been tested at the extreme short end of the term structure where maturities are measured in days or weeks using overnight weekly and monthly repo rates i find that term rates are almost unbiased estimates of the average overnight rate this evidence provides new support for the expectations hypothesis

a reexamination of traditional hypotheses about the term structure a comment an example of a continuous time economy is given whose general equilibrium term structure of interest rates obeys the expectations hypothesis for continuously compounded interest rates and returns contradicting the 1981 claim by cox ingersoll and ross that such an economy is mathematically impossible this example does not generate exploitable arbitrage opportunities of the type cox ingersoll and ross claim must arise the logarithmic expectations hypothesis as we call it it therefore an acceptable benchmark from which to measure term premia in continuous time term structure modeling the expectations hypothesis eh broadly construed postulates that expected returns on risk free bonds of different maturities are equal or equivalently that appropriately calculated forward interest rates equal expected future spot interest rates in comparing the expected returns on two bonds of different maturities however the returns may be compounded in any of four natural ways continuously to the shorter bond s maturity to the longer bond s maturity or to the nearest available future date it has long been understood that if the eh holds in terms of any one of these methods and if interest rates are stochastic jensen s inequality will in general preclude it from holding in terms of any of the other three in practice the convenience and simplicity of continuously compounded interest rates and returns have led many researchers e g roll 1970 mcculloch 1975 fama 1984 to use the first method and therefore what

the monotonicity of the term premium abstract fama s evidence that the term premium on treasury securities is not monotonically increasing is found to depend entirely on the behavior of bid asked mean returns on 9 and 10 month bills and only during the subperiod 8 64 12 72 when transactions costs as reflected in the bid asked spread are taken into account there is found to be no way to exploit this non monotonicity the anomalous behavior of the quotations is attributed to the treasury s auctions of 9 month bills during the period 9 66 10 72 the hypothesis that the term premium is a monotonically increasing function of maturity remains unrefuted

recent advances in estimating term structure models in the past 10 years increasingly sophisticated statistical techniques have been applied to the estimation of increasingly complex models of the term structure of interest rates in reviewing this literature we highlight the facts that have been established and the key unresolved issues the data indicate that within a wide range of interest rates mean reversion in rates is at best weak whether mean reversion is stronger for very high or very low levels of rates is an unresolved issue the absolute volatility of rates increases as the level of rates increases but the strength of this effect and the role and nature of either stochastic volatility or regime switching components in rates are still unclear unfortunately these unresolved issues have important implications for fixed income option pricing and risk measurement including value at risk calculations

do forecast errors or term premia really make the difference between long and short rates abstract forward rates in the term structure of interest contain predictions of future spot rates plus possibly term premia realized spot rates contain predicted spot rates plus forecast errors under rational expectations forecast errors are not predictable by forecasting spot rates using publicly available information bounds on the variation of forecast errors and term premia are obtained for one month treasury bill rates one to two thirds of the variation in the difference between forward rates and realized spot rates is due to variation in term premia

productivity growth technical progress and efficiency change in industrialized countries this paper analyzes productivity growth in 17 oecd countries over the period 1979 1988 a nonparametric programming method activity analysis is used to compute malmquist productivity indexes these are decomposed into two component measures namely technical change and efficiency change we find that u s productivity growth is slightly higher than average all of which is due to technical change japan s productivity growth is the highest in the sample with almost half due to efficiency change jel c43 d24 in this paper we apply recently developed

the volatility of short term interest rates an empirical comparison of alternative models of the term structure of interest rates we estimate and compare a variety of continuous time models of the short term riskless rate using the generalised method of moments we find that the most successful models in capturing the dynamics of the short term interest rate are those that allow the volatility of interest rate changes to be highly sensitive to the level of the riskless rate a number of well known models perform poorly in the comparisons because of their implicit restrictions on term structure volatility we show that these results have important implications for the use of different term structure models in valuing interest rate contingent claims and in hedging interest rate risk

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices