Significance of risk modelling in the term structure of interest rates
AbstractThis study examines the significance of risk modelling and asymmetries when researchers test the popular economic theories concerning the term structure of interest rates. A panel data set of returns on government bond portfolios was used and methods to account for related movements in risk premia across assets with different currency denomination were employed. Rather than attempting to model risk directly in terms of observables, the study has instead exploited an implication of the CAPM concerning how risk premia for a given maturity structure would vary through time in a related manner across different type of assets. In light of recent non-linear research in the area of term structure of interest rates the hypothesis is investigated that the spread effect might have a non-linear impact on excess holding period yield (EHPY). Non-linear effects of spread on EHPY were found in all the maturity structure exception being the short-term maturities. There was evidence for a mean reversion process of returns only for large spread effects in international bond markets. Concerning the rational expectation hypothesis the empirical work provides evidence against it. However, testing this hypothesis over the longer maturity bonds can be very sensitive to the modelling process of risk and possible asymmetries.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 17 (2007)
Issue (Month): 3 ()
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- Papadamou, Stephanos & Tzivinikos, Trifon, 2013. "The risk relevance of International Financial Reporting Standards: Evidence from Greek banks," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 43-54.
- Phillip Daves & Michael Ehrhardt, 2011. "Creating a synthetic after-tax zero-coupon bond using US Treasury STRIP bonds: implications for the true after-tax spot rate," Applied Financial Economics, Taylor & Francis Journals, vol. 21(10), pages 695-705.
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