210959264
Macroeconomic Determinants of Interest Rate Volatility in Indonesia: A Structural VAR Analysis
The determination of interest rates is not only influenced by inflation rate but also the sharing of factors of other macroeconomic variables. The study of the determinants interest rate has developed based on the variability and the methodological concept. Since the purpose of this study is to analyze the effect of macroeconomic variables on the interest rate volatility in Indonesia, we apply ordinary least square to estimates the empirical model of interest rate determinants statically, and the structural VAR analysis dynamically. The result of the estimation reveals that the coefficient estimates of money supply, exchange rate, and the GDP growth have negative and significant effect in the long-run. However, the risk premium shock has positive and significant effect on the interest rate and inflation rate in Indonesia.
154707222
Does greater exchange rate flexibility affect interest rates in post-crisis Asia?
Abstract In post-crisis Asia, all crisis-hit countries (except Malaysia) announced a shift from an exchange rate based monetary policy framework to the adoption of inflation targeting which uses interest rates as the monetary policy operating instrument. In this study, we examine the empirical relationship between exchange rates and interest rates by applying a bivariate VAR–GARCH model to the Asian crisis countries, namely Indonesia, Korea, Philippines and Thailand. The findings suggest that, following the crisis, their currencies exhibit greater sensitivity to competitors’ exchange rates, and that increased exchange rate flexibility stabilizes interest rates only in the short run.
154266537
Determinants of interest rate swap spreads in the US: bounds testing approach to cointegration
This article empirically analyses the determinants of US interest rate swap spreads, and makes two key contributions. First, it considers the nonstationarity of time series, which previous studies have not done, and conducts a cointegration test using the bounds testing approach. The empirical results reveal that there exists a cointegration relationship between interest rate swap spreads and four determinants: the corporate bond spread, the slope of the yield curve, the T bill and Eurodollar (TED) spread and yield volatility. Second, it analyses the determinants of swap spreads using the Dynamic Ordinary Least Squares (DOLS). Considering the cointegration relationship, all explanatory variables were significant within the 5% level.
156007923
Understanding the sources of the exchange rate disconnect puzzle: A variance decomposition approach
In this paper, we apply the monetary model to examine the degree to which economic fundamentals can explain large and persistent fluctuations in the spread between the nominal exchange rate and monetary fundamentals i.e. the so-called “exchange rate disconnect puzzle.” We show that deviations from purchasing power parity account for the bulk of the variation in the deviations of the nominal exchange rate from observed monetary fundamentals, whereas the importance of the risk premium becomes more pronounced after the establishment of the European Economic and Monetary Union.
154426616
The Causal Effect of Mortgage Refinancing on Interest-Rate Volatility: Empirical Evidence and Theoretical Implications
This article investigates the effects of mortgage-backed security (MBS) hedging activity on interest rate volatility and proposes a model that takes these effects into account. An empirical examination suggests that the inclusion of information about MBSs considerably improves model performance in pricing interest rate options and in forecasting future interest rate volatility. The empirical results are consistent with the hypothesis that MBS hedging affects the interest rate volatility implied by both options and the actual interest rate volatility. The results also indicate that the inclusion of information about the MBS universe may result in models that better describe the price of fixed-income securities.
55353676
Interest rate volatility, asymmetric interest rate pass through and the monetary transmission mechanism in the Caribbean compared to US and Asia
We analyse asymmetric interest rate pass through, the impact of interest rate volatility on interest rates and the monetary transmission mechanism in the countries of the CSME22Caribbean Single Market and Economy. using the Asymmetric TAR and MTAR cointegration models by Enders and Siklos (2001) and the EC-EGARCH(1, 1)-M model by Wang and Lee (2009), who examined the same issue for the US and nine Asian countries. The CSME is a unique case of study given that it contains within it a monetary union: the OECS2. First, our results show that there is complete pass through in the retail lending rate for Trinidad and Tobago and for St. Lucia and therefore, by extension, in all the countries of the OECS33Organization of Eastern Caribbean States. but not the other countries of the CSME. In contrast, Wang and Lee (2009) found complete pass through for the US deposit rate but not in the rates of the other nine Asian countries. Second, in Wang and Lee (2009) the results of the TAR and MTAR models show asymmetric cointegrating relationships in the lending rate of three Asian countries and the deposit rate of five Asian countries. Comparatively, our results show asymmetric cointegrating relationship in the lending and deposit rate of only three countries out of six: Jamaica, Guyana and St. Lucia. Third, the results from the conditional mean equation in the EC-EGARCH(1, 1)-M model in Wang and Lee (2009) show that for the countries with asymmetric cointegrating relationships, the lending rate displays downward adjustment rigidity and the deposit rate displays upward adjustment rigidity. In contrast, our results show that both rates for Jamaica display upward adjustment rigidity and both rates for Guyana and St. Lucia display downward adjustment rigidity. Finally, similarly to Wang and Lee (2009), our results from the EC-EGARCH(1, 1)-M models show that the effect of interest rate volatility on interest rates varies among countries. Three out of the Asian countries from Wang and Lee (2009) support the collusive pricing arrangement hypothesis while in our case it happens only in two countries out of six from the CSME: Guyana and St. Lucia. Moreover, the leverage effect exists in the lending rate for two out six countries in the CSME as it happens in Wang and Lee (2009) in two out of their Asian countries. Along the same lines, the leverage effect exists in the deposit rate of three countries in the CSME, contrary to Wang and Lee (2009), who do not find any evidence at all. This shows evidence of an important heterogeneity in the behaviour of the CSME countries and that Trinidad and Tobago and St. Lucia (showing the effect of belonging to a monetary union) are our only analysed countries where, as in the US, there is complete pass through and the central bank can transfer all the cost associated with an increase in its policy rate to the retail rates.
55985658
Determinants of Interest Rate Spread: Some Empirical Evidence from Kenya's Banking Sector
This paper analyzes the role played by bank and industry-specific factors as well as macroeconomic variables in the determination of interest margins in Kenya’s banking sector. Decomposition of the spread using income and balance sheet of the banking sector as a whole and panel data analysis of 39 commercial banks yielded consistent results which highlight the significant role played by bank and industry specific factors and macroeconomic variables in interest rate spread determination. It is shown that between 7 – 10 per cent of the interest margin was attributable to operating costs. Moreover, a 1 per cent increase in operating costs translates to 0.38 per cent increase in interest margins for the sample of banks studied. In addition, a 1 per cent increase in non-performing loans leads to an upward adjustment of interest margins by 0.12 per cent. Macroeconomic factors also contribute to changes in the interest margin. A 1 per cent increase in Treasury bill rates leads to an upward adjustment of interest margins by 0.1 per cent. Likewise, a 1 per cent increase in GDP growth and exchange rate variability results in 0.05 and 0.06 per cent increase in interest spread respectively. In contrast, a 1 per cent increase in loans-liabilities ratio (reflecting degree of intermediation) results in interest margin reduction by 0.17per cent. The results therefore emphasize the need to improve banking sector efficiency, deal with non-performing loans and maintain general macroeconomic stability.
153473780
Impact of exchange rate and money supply on growth, inflation and interest rates in the UK
Growth rates, inflation and interest rates are determined simultaneously in the UK. Depreciations of Sterling pounds contribute to the growth by enhancing international competitiveness. Inflation from the growth of money, depreciation of Sterling and higher interest rates, impacts adversely on it. London being a hub of the global financial market higher interest rates are persistent and coexist with greater liquidity of the financial system, making money supply non-neutral in the short run as in Desai and Weber (1988), Fisher and Whitley (2000), Mellis and Whittaker (2000), Wallis (1969, 1989) for the UK and Sargent (1976) and Fair (1993).
157805369
Macroeconomic determinants of interest rate spreads in Ghana
Purpose - The purpose of this paper is to examine macroeconomic determinants of interest rate spreads in Ghana for the period 1980-2013. Design/methodology/approach - The autoregressive distributed lag bounds test approach to cointegration and the error correction model were used for the estimation. Findings - The results indicate that exchange rate volatility, fiscal deficit, economic growth, and public sector borrowing from commercial banks, increase interest rate spreads in Ghana in both the long and short run. Institutional quality reduces interest rate spreads in the long run while lending interest rate volatility and monetary policy rate reduce interest rate spreads in the short run. Research limitations/implications - The depreciation of the Ghana cedi must be controlled since its volatility increases spreads. There is a need for fiscal discipline since fiscal deficits increase interest rate spreads. Government must reduce its domestic borrowing because the associated crowding-out effect increases interest rate spreads. The central bank must improve its monitoring and regulation of the financial sector in order to reduce spreads. Originality/value - The main novelty of the paper (compared to other studies on Ghana) lies on the one hand; analysing macroeconomic determinants of interest rate spreads and, on the other hand, controlling for the impact of institutional quality on interest rate spreads in Ghana.
13844554
Business Cycles and the Impact of Macroeconomic Surprises on Interest Rate Swap Spreads: Australian Evidence
This study examines the response of Australian interest rate swap spreads to the arrival of macroeconomic news information during the economic expansion and contraction periods. We find that the impact of news announcements on swap spread change differs and largely depends on the state of the economy. The unexpected inflation rate is the only news released that has significant impact on swap spreads across all maturities during contractions and remains the important news announcement throughout the business cycles, while the unanticipated unemployment rate tends to be more relevant to 10-year swap and the unanticipated change in money supply tends to be more relevant to 4- and 7-year swaps during expansions. We also find shocks from these news surprises appear to have significant impact on the conditional volatility of the swap spread change during both economic phases. The macroeconomic shocks in general are negatively related to the conditional volatility of the swap spread change, suggesting that the newsworthy announcements tend to reduce uncertainty on the news announcement days in the swap market during expansion and contraction periods.
13517337
International Linkages and Macroeconomic News Effects on Interest Rate Volatility - Australia and the US'
We examine international linkages between daily time series of US and Australian 3 month Treasury Bills and 10 year Government Bonds from 1987-95, paying particular attention to the effects of macroeconomic announcements in both countries. The 2 country's interest rate data are modelled by a bivariate EGARCH formulation. The results suggest that market participants believed the Reserve Bank of Australia targetted the CPI, while the Federal Reserve targetted economic activity. US macroeconomic activity announcements significantly moved Australian interest rates, particularly at the short end. Australian interest rates moved significantly in response to the previous day's US interest rate shocks. The conditional volatilities of the Australian interest rate changes were also significantly influenced by lagged US interest rate shocks, as well as by surprises in US macroeconomic announcements. Some macroeconomic news announcements raised conditional volatilities, while others reduced them. Overall there was a remarkable and complex array of linkages between the 2 countries.
154839317
Macroeconomic and market determinants of interest rate spreads in low- and middle-income countries
Numerous variables exogenous to the operations of commercial banks have been widely touted in academic literature and popular discourse to be important factors causing the typically high Interest Rate Spreads (IRS) in developing countries. Using data for a group of 33 countries, this article applies dynamic panel estimation techniques to investigate the macroeconomic and market determinants of banking sector IRS in low- and middle-income countries. The empirical results suggest that only one market specific factor, the banking sector reserve requirement, significantly and positively affects IRS. Conversely, several macroeconomic and macro-policy variables such as inflation, government crowding-out and the discount rate are important determinants of IRS. Results are also examined to ascertain whether the determinants of spreads vary across regional groupings of countries.
10715465
Determinants of Japanese Yen interest rate swap spreads: Evidence from a smooth transition vector autoregressive model
This study investigates the determinants of variations in the yield spreads between Japanese yen interest rate swaps and Japan government bonds for a period from 1997 to 2005. A smooth transition vector autoregressive (STVAR) model and generalized impulse response functions are used to analyze the impact of various economic shocks on swap spreads. The volatility based on a GARCH (generalized autoregressive conditional heteroskedasticity) model of the government bond rate is identified as the transition variable that controls the smooth transition from a high volatility regime to a low volatility regime. The break point of the regime shift occurs around the end of the Japanese banking crisis. The impact of economic shocks on swap spreads varies across the maturity of swap spreads as well as regimes. Overall, swap spreads are more responsive to the economic shocks in the high volatility regime. Moreover, a volatility shock has profound effects on shorter maturity spreads, whereas the term structure shock plays an important role in impacting longer maturity spreads. Results of this study also show noticeable differences between the nonlinear and linear impulse response functions. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 28:82–107, 2008
152809698
Impact of Macroeconomic Announcements on Interest Rate Futures: High-Frequency Evidence from Australia
This paper investigates the behavior of Australian interest rate futures around the release of major scheduled macroeconomic announcements. The analysis of price volatility, returns, trading activity and bid-ask spreads finds that the adjustment to new information occurs quickly with the significant part of the reaction complete within 30-seconds. The 30-seconds immediately prior to the announcement exhibits high volatility, low levels of volume, and high bid-ask spreads. In the 30 seconds following the scheduled announcement there is strong evidence of a sharp increase in price volatility, significant positive correlation in returns, large adjusted returns and high levels of trading activity. The reaction is stronger in shorter maturity contracts. There is some evidence of price reversals occurring following this sharp adjustment. The 2007-2008 Global Financial Crisis has had a significant impact on the reaction of Australian interest rate futures to major macroeconomic announcements, with evidence of higher volatility, significantly higher returns and decreasing market activity.