Since the floating exchange rate regime was set up in 1973, the issue of exchange rate has been concerned not only by corporate organizations but also folks. For multinational corporate institutions, exchange rate plays an important role in their profit. For folks, exchange rate influences the cost of going abroad. What¡¦s more, it is also one of investment tool for making profits. There are many empirical researches attesting that the term structure can forecast economic growth, and the exchange rate can be predicted by economic growth. However, no researches have shown the direct relationship between the term structure and the exchange rate. Therefore, the main purpose of this article is to examine whether the term structure can predict the exchange rate or not, and then to us this result to compare with the empirical result in which many researches claim that the real long term interest rate can predict the exchange rate very well. In the final step, we use the method of out of sample test to examine our model and random work model to make our examination more robust. In conclusion, our empirical research attests that the relationship between the term structure and the exchange rate is significantly negative. This result also shows that the ability of our model¡¦s prediction is better than that of others.

Affine term structure models (ATSMs) are known to have a trade-off in predicting future Treasury yields and fitting the time-varying volatility of interest rates. First, I empirically study the role of macroeconomic variables in simultaneously achieving these two goals under affine models. To this end, I incorporate a liquidity demand theory via a measure of the velocity of money into affine models. I find that this considerably reduces the statistical tension between matching the first and second moments of interest rates. In terms of forecasting yields, the models with the velocity of money outperform among the ATSMs examined, including those with inflation and real activity. My result is robust across maturities, forecasting horizons, risk price specifications, and the number of latent factors. Next, I incorporate latent macro factors and the spread factor between the short-term Treasury yield and the federal funds rate into an affine term structure model by imposing cross-equation restrictions from no-arbitrage using daily data. In doing so, I identify the highfrequency monetary policy rule that describes the central bank's reaction to expected inflation and real activity at daily frequency. I find that my affine model with macro factors and the spread factor shows better forecasting performance.

Interactions between macroeconomic fundamentals and term structure of interest rates be stronger according to the way of changes in structure of worldwide economy. Combined macro-finance analysis determines the joint dynamics of term structure of interest rates and macroeconomic fundamentals. This thesis provides analysis of two existing macro-finance models and an original one. Parameter estimations for these three macro-finance term structure models are done for monthly Turkish data by use of an efficient recursive estimator Kalman filter. In spite of the small scale application the results are satisfactory except first model but with longer sets of macroeconomic variables and interest rate data models provide more encouraging results.

The essence of the interest rate modeling by using Heath-Jarrow-Morton framework is to find the drift condition of the instantaneous forward rate dynamics so that the entire term structure is arbitrage free. In this study, instantaneous forward interest rates are modeled using random fields and Markov Jump processes and the drift conditions of the forward rate dynamics are given. Moreover, the methodology presented in this study is extended to certain financial settings and instruments such as multi-country interest rate models, term structure of defaultable bond prices and forward measures. Also a general framework for bond prices via nuclear space valued semi-martingales is introduced.

In my dissertation, I explore the relationship between capital controls and the choice of the maturity structure of external debt in a general equilibrium setup, incorporating explicitly the role of international lenders. I look at specific types of capital controls which take the form of date-specific and maturity-specific reserve requirements on external borrowing. I consider two questions: How is the maturity structure of external debt determined in a world general equilibrium? What are the effects of date- and maturity-specific reserve requirements on the maturity structure of external debt? Can they prevent a bank run? I develop a simple Diamond-Dybvig-type model with three dates. In the low income countries, banks arise endogenously. There are two short-term bonds and one long-term bond offered by the domestic banks to international lenders. First I look at a simple model were international lending is modeled exogenously. I consider explicitly the maturity composition of capital inflows to a domestic economy. I show that the holdings of both short-term bonds are not differentiated according to date. Second, I consider international lending behavior explicitly. The world consists of two large open economies: one with high income and one with low income. The high income countries lend to low income countries. There exist multiple equilibria and some are characterized by relative price indeterminacy. Third, I discuss date-specific and maturity- specific reserve requirements. In my setup reserve requirements play the role of a tax and the role of providing liquidity for each bond at different dates. I show that they reduce the scope of indeterminacy. In some equilibria, I identify a case in which the reserve requirement rate on the long-term debt must be higher than that on the short-term debt for a tilt towards a longer maturity structure. Fourth, I introduce the possibility of an unexpected bank run. I show that some specific combination of date-and maturity-specific reserve requirements reduce the vulnerability to bank runs. With regard to the post-bank-run role of international lenders, I show that international lenders may still want to provide new short-term lending to the bank after the occurrence of a bank run.

<p>My dissertation, consisting of three related essays, aims to understand the role of macroeconomic risks in the stock and bond markets. In the first chapter, I build a financial intermediary sector with a leverage constraint a la Gertler and Kiyotaki (2010) into an endowment economy with an independently and identically distributed consumption growth process and recursive preferences. I use a global method to solve the model, and show that accounting for occasionally binding constraint is important for quantifying the asset pricing implications. Quantitatively, the model generates a procyclical and persistent variation of price-dividend ratio, and a high and countercyclical equity premium. As a distinct prediction from the model, in the credit crunch, high TED spread, due to a liquidity premium, coincides with low stock price and high stock market volatility, a pattern I confirm in the data.</p><p>In the second chapter, which is coauthored with Hengjie Ai and Mariano Croce, we model investment options as intangible capital in a production economy in which younger vintages of assets in place have lower exposure to aggregate productivity risk. In equilibrium, physical capital requires a substantially higher expected return than intangible capital. Quantitatively, our model rationalizes a significant share of the observed difference in the average return of book-to-market-sorted portfolios (value premium). Our economy also produces (1) a high premium of the aggregate stock market over the risk-free interest rate, (2) a low and smooth risk-free interest rate, and (3) key features of the consumption and investment dynamics in the U.S. data.</p><p>In the third chapter, I study the joint determinants of stock and bond returns in Bansal and Yaron (2004) long-run risks model framework with regime shifts in consumption and inflation dynamics -- in particular, the means, volatilities, and the correlation structure between consumption growth and inflation are regime-dependent. This general equilibrium framework can (1) generate time-varying and switching signs of stock and bond correlations, as well as switching signs of bond risk premium; (2) quantitatively reproduce various other salient empirical features in stock and bond markets, including time-varying equity and bond return premia, regime shifts in real and nominal yield curve, the violation of expectations hypothesis of bond returns. The model shows that term structure of interest rates and stock-bond correlation are intimately related to business cycles, while long-run risks play a more important role to account for high equity premium than business cycle risks.</p> / Dissertation

The uncertainty attached to future movements of interest rates is an essential part of the Financial Decision Theory and requires an awareness of the stochastic movement of these rates. Several approaches have been proposed for modeling the one-factor short rate models where some lead to arbitrage-free term structures. However, no definite consensus has been reached with regard to the best approach for interest rate modeling. In this work, we briefly examine the existing one-factor interest rate models and calibrate Vasicek and Hull-White (Extended Vasicek) Models by using Turkey&#039 / s term structure. Moreover, a trinomial interest rate tree is constructed to represent the evolution of Turkey&rsquo / s zero coupon rates.

Random field models have provided a flexible environment in which the properties of the term structure of interest rates are captured almost as observed. In this study we provide an overview of the forward rate random fiield models and propose an extension in which the forward rates fluctuate along with a two parameter process represented by a random field. We then provide a mathematical expression of the yield curve under this model and sketch the prospective utilities and applications of this model for interest rate management.

This volume contains five essays on topics related to interest rate theory.The first essay, Affine Term Structures and Short-Rate Realizations of Forward Rate Models Driven by Jump-Diffusion Processes, examines the problem of determining when a given forward rate model has a short-rate realization, and when a short-rate model gives rise to an affine term structure.The second essay, On the Inversion of the Yield Curve, co-authored with Tomas Björk, considers a general benchmark short-rate factor model of the term structure of interest rates. It is showed that the benchmark model can be extended so that the implied theoretical term structure can be fitted exactly to an arbitrary initially observed yield curve. A general formula for pricing simple contingent claims in the extended model is also provided.The third essay, An Efficient Series Expansion Approach to a Two-Factor Model of the Term Structure of Interest Rates, presents a two-factor model where both factors follow CIR-type diffusion processes. A series expansion is used to solve for discount bond prices. The model is also compared with a corresponding Gaussian model, and no substantial differences are found between the two models regarding the flexibility and shapes of the yield curves and forward rate curves they generate.The fourth essay, An Efficient Series Expansion Approach to The Balduzzi, Das, Foresi and Sundaram Model of the Term Structure of Interest Rates, revisits the model by BDFS, and apart from giving an explicit solution to discount bond prices by using a series expansion, the model is extended so that the implied theoretical term structure can be fitted exactly to an arbitrary initially observed yield curve.The fifth essay, Quasi Arbitrage-Free Discount Bond Prices in the Cox, Ingersoll and Ross Model, offers an example of a less regular solution to the term structure equation in the CIR model. This new and different solution fails to meet one of the standard regularity conditions, but only at one particular point. Under additional conditions, the solution can be interpreted as a term structure, which is referred to as a "quasi arbitrage-free term structure." / Diss. Stockholm : Handelshögsk., 2001

Esta dissertação tem como objetivo apresentar um caso específico de Interpolação da Estrutura a Termo da Taxa de Juros (ETTJ) com base no processo estocástico que de- termina a taxa de juros, o qual é aqui denominado por interpolação estrutural. Este método estrutural permite a calibração das curvas de desconto e de rendimento, por meio do ajuste dos parâmetros do modelo generalizado Black-Karasinski sob a hipótese de não arbitragem. São apresentados três métodos distintos de calibragem. O primeiro deles é constituído pela solução numérica do sistema de equações que satisfaz a hipótese de não arbitragem. O segundo método remete-se a inversão dos parâmetros do modelo de forma exata, a partir da definição da curva de rendimento. O terceiro e último método apresenta uma solução aproximada a partir de um problema reduzido. Mostramos que os métodos são equivalentes quando se utiliza a mesma definição para a curva de rendimentos. A importância deste resultado reside no desenvolvimento de algoritmos de fácil implemen- tação computacional e na possibilidade de usar esse método de interpolação com base em um modelo de determinação da taxa de juros em trabalhos empíricos de previsão e determinação da estrutura a termo da taxa de juros. / This paper aims to present a special case of interpolation of the Term Structure of In- terest Rates based on the stochastic process that determines the interest rate, which is here called by structural interpolation. This structural method allows the calibration discounts and yields curves adjusted through the parameters of the generalized Black-Karasinski model under the assumption of no arbitrage. Three distinct methods of calibration are presented. The first consists of the numerical solution of the system of equations that satisfes the hypothesis of no arbitrage. The second method refers to the inversion of the parameters model, from the definition of the yield curve. The third and last method presents an approximate solution from a smaller problem. We show that the three meth- ods are equivalent when using the same definition for the yield curve. The importance of this result lies in the development of algorithms for easy computational implementation and the possibility of using this interpolation method based on a model for determining the rate of interest for empirical prediction and determination of the term structure of interest rates.