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Taking Positive Interest Rates Seriously

In: Advances In Quantitative Analysis Of Finance And Accounting

Author

Listed:
  • Enlin Pan

    (Chicago Partners, LLC, USA)

  • Liuren Wu

    (Baruch College, City University of New York, USA)

Abstract

We present a dynamic term structure model in which interest rates of all maturities are bounded from below at zero. Positivity and continuity, combined with no arbitrage, result in only one functional form for the term structure with three sources of risk. We cast the model into a state-space form and extract the three sources of systematic risk from both the US Treasury yields and the US dollar swap rates. We analyze the different dynamic behaviors of the two markets during credit crises and liquidity squeezes.

Suggested Citation

  • Enlin Pan & Liuren Wu, 2006. "Taking Positive Interest Rates Seriously," World Scientific Book Chapters, in: Cheng-Few Lee (ed.), Advances In Quantitative Analysis Of Finance And Accounting, chapter 14, pages 327-356, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789812772824_0014
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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