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The non-linear evolution of high frequency short term interest rates
2008-04-02, Cripwell, Peter, Edelman, David
In this paper new results are documented regarding the short term evolution of global short term interest rates. Much work has been carried out concerning the evolution of interest rates over long time scales, on the order on one month or greater. However high frequency data has only been considered in a limited number of studies. In this study the evolution of the short term yield curve, on a day to day basis, is considered and results are presented that suggest that over these short time scales, short term interest rates exhibit non-linear autoregressive behaviour, in contradiction of the efficient markets hypothesis. In addition the high frequency data indicates that the observed co-movement across currencies of longer maturity interest rates result from a vector error correction process (VECM). Greater information on the nature of the process may be obtained by considering a non-linear VECM process. Based on the output of both non-linear uni-variate and multi-variate models, limited short term statistically significant predictions of the evolution of various short term interest rate instruments may be carried out.
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Conundrum or complication : a study of yield curve dynamics under unusual economic conditions and monetary policies
2008-03-04, Cripwell, Peter, Edelman, David
The definition of the decline of long term yields in the light of increasing short term yields as a conundrum by Chairman Greenspan in February 2005 has generated a significant amount of research. This paper presents a study of yield curve dynamics over this period using economic surprise data as the diagnostic tool. Results are presented for both US and Japanese data which indicate a non-linear response of the yield curve to economic data and monetary policy over the period in question. Further, a limited model is presented that is consistent with the observations. This can lead to an explanation of the conundrum in terms of a non-linear yield response to expected long term inflation and a variable expected long term real rate.