A no-arbitrage macro finance approach to the term structure of interest rates

Thafeni, Phumza (2015-03)

Thesis (MSc)--Stellenbosch University, 2014.

Thesis

ENGLISH ABSTRACT: This work analysis the main macro-finance models of the term structure of interest rates that determines the joint dynamics of the term structure and the macroeconomic fundamentals under no-arbitrage approach. There has been a long search during the past decades of trying to study the relationship between the term structure of interest rates and the economy, to the extent that much of recent research has combined elements of finance, monetary economics, and the macroeconomics to analyse the term structure. The central interest of the thesis is based on two important notions. Firstly, it is picking up from the important work of Ang and Piazzesi (2003) model who suggested a joint macro- finance strategy in a discrete time affine setting, by also imposing the classical Taylor (1993) rule to determine the association between yields and macroeconomic variables through monetary policy. There is a strong intuition from the Taylor rule literature that suggests that such macroeconomic variables as in inflation and real activity should matter for the interest rate, which is the monetary policy instrument. Since from this important framework, no-arbitrage macro-finance approach to the term structure of interest rates has become an active field of cross-disciplinary research between financial economics and macroeconomics. Secondly, the importance of forecasting the yield curve using the variations on the Nelson and Siegel (1987) exponential components framework to capture the dynamics of the entire yield curve into three dimensional parameters evolving dynamically. Nelson-Siegel approach is a convenient and parsimonious approximation method which has been trusted to work best for fitting and forecasting the yield curve. The work that has caught quite much of interest under this framework is the generalized arbitrage-free Nelson-Siegel macro- nance term structure model with macroeconomic fundamentals, (Li et al. (2012)), that characterises the joint dynamic interaction between yields and the macroeconomy and the dynamic relationship between bond risk-premia and the economy. According to Li et al. (2012), risk-premia is found to be closely linked to macroeconomic activities and its variations can be analysed. The approach improves the estimation and the challenges on identication of risk parameters that has been faced in recent macro-finance literature.

AFRIKAANSE OPSOMMING: Hierdie werk ontleed die makro- nansiese modelle van die term struktuur van rentekoers pryse wat die gesamentlike dinamika bepaal van die term struktuur en die makroekonomiese fundamentele faktore in 'n geen arbitrage wêreld. Daar was 'n lang gesoek in afgelope dekades gewees wat probeer om die verhouding tussen die term struktuur van rentekoerse en die ekonomie te bestudeer, tot die gevolg dat baie onlangse navorsing elemente van nansies, monetêre ekonomie en die makroekonomie gekombineer het om die term struktuur te analiseer. Die sentrale belang van hierdie proefskrif is gebaseer op twee belangrike begrippe. Eerstens, dit tel op by die belangrike werk van die Ang and Piazzesi (2003) model wat 'n gesamentlike makro- nansiering strategie voorstel in 'n diskrete tyd a ene ligging, deur ook die klassieke Taylor (1993) reël om assosiasie te bepaal tussen opbrengste en makroekonomiese veranderlikes deur middel van monetêre beleid te imposeer. Daar is 'n sterk aanvoeling van die Taylor reël literatuur wat daarop dui dat sodanige makroekonomiese veranderlikes soos in asie en die werklike aktiwiteit moet saak maak vir die rentekoers, wat die monetêre beleid instrument is. Sedert hierdie belangrike raamwerk, het geen-arbitrage makro- nansies benadering tot term struktuur van rentekoerse 'n aktiewe gebied van kruis-dissiplinêre navorsing tussen nansiële ekonomie en makroekonomie geword. Tweedens, die belangrikheid van voorspelling van opbrengskromme met behulp van variasies op die Nelson and Siegel (1987) eksponensiële komponente raamwerk om dinamika van die hele opbrengskromme te vang in drie dimensionele parameters wat dinamies ontwikkel. Die Nelson-Siegel benadering is 'n gerie ike en spaarsamige benaderingsmetode wat reeds vertrou word om die beste pas te bewerkstellig en voorspelling van die opbrengskromme. Die werk wat nogal baie belangstelling ontvang het onder hierdie raamwerk is die algemene arbitrage-vrye Nelson-Siegel makro- nansiele term struktuur model met makroekonomiese grondbeginsels, (Li et al. (2012)), wat kenmerkend van die gesamentlike dinamiese interaksie tussen die opbrengs en die makroekonomie en die dinamiese verhouding tussen band risiko-premies en die ekonomie is. Volgens Li et al. (2012), word risiko-premies bevind om nou gekoppel te wees aan makroekonomiese aktiwiteite en wat se variasies ontleed kan word. Die benadering verbeter die skatting en die uitdagings van identi- sering van risiko parameters wat teegekom is in die afgelope makro- nansiese literatuur.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/96108
This item appears in the following collections: