Tag: interest rates

Government spending news and the term structure of interest rates

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.

Government spending news and the term structure of interest rates

Authors:

Nicola Cofelice and Sarah Zoi

Master Program:

Macroeconomic Policy and Financial Markets

Paper Abstract:

Studying the effect of a fiscal policy shock on the term structure of interest rates has long been a controversial issue. On the one hand, economic theory predicts that government spending should drive up interest rates; on the other hand, many empirical analyses found negative or not significant responses of the yield curve to different types of fiscal shocks. A recent stream of literature on fiscal foresight showed how news about future fiscal policy may anticipate the effects of public expenditure and pose a challenge for the recovery of structural shocks due to a problem of non-fundamentalness. We study the effect of a “foresight shock” on the term structure of interest rates using an identification strategy based on the information contained in the projections by the Survey of Professional Forecasters. Our results support the evidence of fiscal foresight and show how changes in expectations stimulate positive responses of the term structure anticipating the effects of a government spending shock.

Read the full paper or view slides below:

[slideshare id=38818725&doc=spending-term-structure-slides-140908060451-phpapp02]

Interest rates after the credit crunch crisis: single versus multiple curve approach

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.

Interest rates after the credit crunch crisis: single versus multiple curve approach

Authors:

Oleksandr Dmytriiev, Yining Geng, and Cem Sinan Ozturk

Master Program:

Finance

Paper Abstract:

For interest rate derivative pricing, 2007 crisis was a turning point. Prior to the crisis, market interest rates showed consistencies that allowed the use of a single curve for both forwarding and discounting. After the crisis, the inconsistencies in the market interest rates led to development of a new method of the pricing interest rate derivatives, which is called Multi-Curve Framework. We studied the influence of the multi-curve approach on the interest rate derivative pricing. We calculated and compared the price of a simple swap in both multi-curve and single curve approaches. We suggested the generalization of the lattice approach, which is usually used to approximate the short interest rate models, for milti-curve framework. This is a novel result, which have not been developed in the scientific literature. As an example, we showed how to use the Black-Derman-Toy interest rate model on binomial lattice in multi-curve framework and calculated the price of the 2-8 period swaption in a single (LIBOR) curve and two-curve (OIS+LIBOR) approaches. This technique can be used for pricing any interest rate instrument.

Read the full paper or view slides below:

[slideshare id=37188585&doc=interest-rates-credit-slides-140721040122-phpapp02]