We analyze the effects of prudential regulation on short-term interest rates. The European Market Infrastructure Regulation (EMIR) induces clearing houses (CCPs) to supply large amounts cash in reverse repurchase agreements (repos). Basel III, contrast, disincentivizes borrowing demand by tightening banks’ balance sheet constraints. Using unique regulatory data CCP investment activity and repo ...

In this equation, the coefficients α and q cannot be constants and in fact must be modeled rather carefully to ensure that the bond satisfies its boundary conditions. For example, the bond must be worth $1 at maturity. Also, the volatility of the bond price should decrease as the bond approaches maturity—a given change in interest rates affects the price of a long-lived bond more than the price...

In this paper we investigate the behavior of credit yield spreads in an equilibrium framework in which the risk-free interest rate and yields on risky debt are jointly and endogenously determined. The model is one of a partially observable pure exchange economy in which debt is a contingent claim on the cash flow. We find that an increase in risk aversion or an increase in uncertainty about gro...

We analyze the behavior of world interest rates, focusing on the ramifications of European Monetary Union. Our analysis indicates that nominal US interest rates tend to drive European rates at both the short and long horizons. There is some evidence that US rates are becoming increasingly influenced by European rates, but the relationship is still far from symmetric, despite EMU. We also invest...

This paper presents a consistent and arbitrage-free multifactor model of the term structure of interest rates in which yields at selected fixed maturities follow a parametric multivariate Markov diffusion process with " stochastic volatility. " The yield of any zero-coupon bond is taken to be a maturity-dependent affine combination of the selected " basis " set of yields. We provide necessary a...

In South Africa, long-term interest rates have often been high in real terms and relatively volatile, although they declined somewhat in recent years (Figure 13.1). This chapter attempts to show that this decline is due not only to an improved external capital market but also to the strong progress made in macroeconomic management. In particular, the implementation of policy measures, such as d...

Conventional wisdom posits that high interest rates stem capital flight. But if higher interest rates increase the probability of debt default, they might have anti-orthodox effects. This note develops a framework for evaluating conditions under which this might occur.  2000 Elsevier Science S.A. All rights reserved.