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Journal ArticleDOI

Some Theoretical Problems Suggested by the Movements of Interest Rates, Bond Yields and Stock Prices in the United States Since 1856.

01 Jan 1938-Journal of the Royal Statistical Society (JSTOR)-Vol. 101, Iss: 3, pp 620
About: This article is published in Journal of the Royal Statistical Society.The article was published on 1938-01-01. It has received 316 citations till now. The article focuses on the topics: Interest rate & Bond.
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TL;DR: In this paper, the authors estimate a model that summarizes the yield curve using latent factors (specifically, level, slope, and curvature) and also include observable macroeconomic variables (i.e., real activity, inflation, and monetary policy instrument).
Abstract: We estimate a model that summarizes the yield curve using latent factors (specifically, level, slope, and curvature) and also includes observable macroeconomic variables (specifically, real activity, inflation, and the monetary policy instrument) Our goal is to provide a characterization of the dynamic interactions between the macroeconomy and the yield curve We find strong evidence of the effects of macro variables on future movements in the yield curve and evidence for a reverse influence as well We also relate our results to the expectations hypothesis

790 citations

Journal ArticleDOI
TL;DR: In this paper, the issue of how various assets are priced is addressed, and the real estate pricing mechanism includes residual risk and non-risk factors such as taxes, marketability costs and information costs.
Abstract: Real estate returns, measured unleveraged, have been between those of stocks and bonds over 1960–1982. Due to appraisal smoothing and imperfect marketability, one must be careful about directly comparing measured real estate returns with those on other assets. It is likely, however, that low correlations with stocks and bonds make real estate a diversification opportunity for traditional portfolio managers. In addition, the issue of how various assets are priced is addressed. While stocks are priced primarily on market or beta risk, and bonds are priced primarily on interest rate and default risk, the real estate pricing mechanism includes residual risk and non-risk factors such as taxes, marketability costs and information costs.

351 citations

Journal ArticleDOI
TL;DR: In this article, the maturity composition and the term structure of interest rate spreads of government debt in emerging markets were studied and the trade-off between these hedging and incentive benefits was quantitatively important for understanding the maturity structure of emerging markets.
Abstract: This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds rises more than the spread on long-term bonds. We build a dynamic model of international borrowing with endogenous default and multiple debt maturities. Long-term debt provides a hedge against future fluctuations in spreads, whereas short-term debt is more effective at providing incentives to repay. The trade-off between these hedging and incentive benefits is quantitatively important for understanding the maturity structure in emerging markets.

345 citations

Journal ArticleDOI
TL;DR: In this article, holding period returns to constant duration portfolios of U.S. Govern? ment notes and bonds are examined, and the authors measure the return premium generated by liquidity differences in bonds.
Abstract: This paper examines holding period returns to constant duration portfolios of U.S. Govern? ment notes and bonds, and measures the return premium generated by liquidity differences in bonds. The approach compares constant duration portfolios constructed in two distinct ways: one using only bonds issued in the most recent Treasury auction, one using all other bonds. Comparisons of the resulting series are made meaningful by choosing narrow du? ration ranges in the portfolio formation procedure. This, in turn, induces a missing data problem in the created time series. Parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data. It is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments.

305 citations

Journal ArticleDOI
TL;DR: In this article, the authors investigated whether this explanation is valid, finding no evidence that it is. But they did find that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits.
Abstract: Several recent empirical studies have found no evidence of a positive association between interest rates and current and past budget deficits.' One possible explanation for this finding is that interest rates are related much more to the expectation of future budget deficits than to current and past budget deficits. In this paper, I investigate whether this explanation is valid, finding no evidence that it is. Section II briefly formulates and discusses the hypothesis under consideration, stating some of its implications. Section III presents the results of regressing the commercial paper rate, Moody's Aaa bond rate, and the ex post real commercial paper rate on current and past government spending, budget deficits, and real money supplies. The regressions have been fitted to the entire sample of monthly data, spanning the period between June 1908 and March 1984, and to 11

305 citations

References
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Journal ArticleDOI
TL;DR: The authors analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987, finding that stock return variability was unusually high during the 1929-1939 Great Depression.
Abstract: This paper analyzes the relation of stock volatility with real and nominal macroeconomic volatility, economic activity, financial leverage, and stock trading activity using monthly data from 1857 to 1987. An important fact, previously noted by Officer (1973), is that stock return variability was unusually high during the 1929-1939 Great Depression. While aggregate leverage is significantly correlated with volatility, it explains a relatively small part of the movements in stock volatility. The amplitude of the fluctuations in aggregate stock volatility is difficult to explain using simple models of stock valuation, especially during the Great Depression. ESTIMATES OF THE STANDARD deviation of monthly stock returns vary from two to twenty percent per month during the 1857-1987 period. Tests for whether differences this large could be attributable to estimation error strongly reject the hypothesis of constant variance. Large changes in the ex ante volatility of market returns have important negative effects on risk-averse investors. Moreover, changes in the level of market volatility can have important effects on capital investment, consumption, and other business cycle variables. This raises the question of why stock volatility changes so much over time. Many researchers have studied movements in aggregate stock market volatility. Officer (1973) relates these changes to the volatility of macroeconomic variables. Black (1976) and Christie (1982) argue that financial leverage partly explains this phenomenon. Recently, there have been many attempts to relate changes in stock market volatility to changes in expected returns to stocks, including Merton (1980), Pindyck (1984), Poterba and Summers (1986), French, Schwert, and Stambaugh (1987), Bollerslev, Engle, and Wooldridge (1988), and Abel (1988). Mascaro and Meltzer (1983) and Lauterbach (1989) find that macroeconomic volatility is related to interest rates. Shiller (1981a,b) argues that the level of stock market volatility is too high relative to the ex post variability of dividends. In present value models such as Shiller's, a change in the volatility of either future cash flows or discount rates

3,094 citations

Journal ArticleDOI
TL;DR: In this article, the authors incorporate a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters.
Abstract: This paper incorporates a time-varying intensity of disasters in the Rietz-Barro hypothesis that risk premia result from the possibility of rare, large disasters. During a disaster, an asset’s fundamental value falls by a time-varying amount. This in turn generates time-varying risk premia and thus volatile asset prices and return predictability. Using the recent technique of linearity-generating processes (Gabaix 2007), the model is tractable, and all prices are exactly solved in closed form. In the “variable rare disasters” framework, the following empirical regularities can be understood qualitatively: (i) equity premium puzzle (ii) risk-free rate-puzzle (iii) excess volatility puzzle (iv) predictability of aggregate stock market returns with price-dividend ratios (v) value premium (vi) often greater explanatory power of characteristics than covariances for asset returns (vii) upward sloping nominal yield curve (viiii) a steep yield curve predicts high bond excess returns and a fall in long term rates (ix) corporate bond spread puzzle (x) high price of deep out-of-the-money puts. I also provide a calibration in which those puzzles can be understood quantitatively as well. The fear of disaster can be interpreted literally, or can be viewed as a tractable way to model time-varying risk-aversion or investor sentiment. (JEL: E43, E44, G12)

952 citations

Journal ArticleDOI
TL;DR: In this paper, the issue of how various assets are priced is addressed, and the real estate pricing mechanism includes residual risk and non-risk factors such as taxes, marketability costs and information costs.
Abstract: Real estate returns, measured unleveraged, have been between those of stocks and bonds over 1960–1982. Due to appraisal smoothing and imperfect marketability, one must be careful about directly comparing measured real estate returns with those on other assets. It is likely, however, that low correlations with stocks and bonds make real estate a diversification opportunity for traditional portfolio managers. In addition, the issue of how various assets are priced is addressed. While stocks are priced primarily on market or beta risk, and bonds are priced primarily on interest rate and default risk, the real estate pricing mechanism includes residual risk and non-risk factors such as taxes, marketability costs and information costs.

351 citations

Journal ArticleDOI
TL;DR: In this article, the maturity composition and the term structure of interest rate spreads of government debt in emerging markets were studied and the trade-off between these hedging and incentive benefits was quantitatively important for understanding the maturity structure of emerging markets.
Abstract: This paper studies the maturity composition and the term structure of interest rate spreads of government debt in emerging markets. In the data, when interest rate spreads rise, debt maturity shortens and the spread on short-term bonds rises more than the spread on long-term bonds. We build a dynamic model of international borrowing with endogenous default and multiple debt maturities. Long-term debt provides a hedge against future fluctuations in spreads, whereas short-term debt is more effective at providing incentives to repay. The trade-off between these hedging and incentive benefits is quantitatively important for understanding the maturity structure in emerging markets.

345 citations

Journal ArticleDOI
TL;DR: In this article, holding period returns to constant duration portfolios of U.S. Govern? ment notes and bonds are examined, and the authors measure the return premium generated by liquidity differences in bonds.
Abstract: This paper examines holding period returns to constant duration portfolios of U.S. Govern? ment notes and bonds, and measures the return premium generated by liquidity differences in bonds. The approach compares constant duration portfolios constructed in two distinct ways: one using only bonds issued in the most recent Treasury auction, one using all other bonds. Comparisons of the resulting series are made meaningful by choosing narrow du? ration ranges in the portfolio formation procedure. This, in turn, induces a missing data problem in the created time series. Parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data. It is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments.

305 citations