Testing the expectations theory of the term structure in threshold models

We test the expectations theory of the term structure of U.S. interest rates in nonlinear systems. These models allow the response of the change in short rates to past values of the spread to depend upon the level of the spread. The nonlinear system is tested against a linear system, and the results of testing the expectations theory in both models are contrasted. We find that the results of tests of the implications of the expectations theory depend on the size and sign of the spread. The long maturity spread predicts future changes of the short rate only when it is high.

Bayesian estimation of co-integrating thresholds in the term structure of interest rates.

Threshold Error Correction Models are used to analyse the term structure of interest Rates. The paper develops and uses a generalisation of existing models that encompasses both the Band and Equilibrium threshold models of [Balke and Fomby ((1997) Threshold cointegration. Int Econ Rev 38(3):627–645)] and estimates this model using a Bayesian approach. Evidence is found for threshold effects in pairs of longer rates but not in pairs of short rates. The Band threshold model is supported in preference to the Equilibrium model.

Lease maturity and initial rent: is there a term structure for UK commercial property leases?

This paper investigates the relationship between lease maturity and rent in commercial property. Over the last decade market-led changes to lease structures, the threat of government intervention and the associated emergence of the Codes of Practice for commercial leases have stimulated growing interest in pricing of commercial property leases. Seminal work by Grenadier (1995) derived a set of hypotheses about the pricing of different lease lengths in different market conditions. Whilst there is a compelling theoretical case for and a strong intuitive expectation of differential pricing of different lease maturities, to date the empirical evidence is inconclusive. Two Swedish studies have found mixed results (Gunnelin and Soderbergh 2003 and Englund et al 2003). In only half the cases is the null hypothesis that lease length has no effect rejected. In the UK, Crosby et al (2003) report counterintuitive results. In some markets, they find that short lease terms are associated with low rents, whilst in others they are associated with high rents. Drawing upon a substantial database of commercial lettings in central London (West End and City of London) over the last decade, we investigate the relationship between rent and lease maturity. In particular, we test whether a building quality variable omitted in previous studies provides empirical results that are more consistent with the theoretical and intuitive a priori expectations. It is found that initial leases rates are upward sloping with the lease term and that this relationship is constant over time.

A comparison of tests of non-linear cointegration with an application to the predictability of US interest rates using the term structure

We test whether there are nonlinearities in the response of short- and long-term interest rates to the spread in interest rates, and assess the out-of-sample predictability of interest rates using linear and nonlinear models. We find strong evidence of nonlinearities in the response of interest rates to the spread. Nonlinearities are shown to result in more accurate short-horizon forecasts, especially of the spread.

Public real estate and the term structure of interest rates: a cross-country study

Using a variation of the Nelson-Siegel term structure model we examine the sensitivity of real estate securities in six key global markets to unexpected changes in the level, slop and curvature of the yield curve. Our results confirm the time-sensitive nature of the exposure and sensitivity to interest rates and highlight the importance of considering the entire term structure of interest rates. One issue that is of particular of interest is that despite the 2007-9 financial crisis the importance of unanticipated interest rate risk weakens post 2003. Although the analysis does examine a range of markets the empirical analysis is unable to provide definitive evidence as to whether REIT and property-company markets display heightened or reduced exposure.

Consistent approximate models of the global atmosphere: shallow, deep, hydrostatic, quasi-hydrostatic and non-hydrostatic

We study global atmosphere models that are at least as accurate as the hydrostatic primitive equations (HPEs), reviewing known results and reporting some new ones. The HPEs make spherical geopotential and shallow atmosphere approximations in addition to the hydrostatic approximation. As is well known, a consistent application of the shallow atmosphere approximation requires omission of those Coriolis terms that vary as the cosine of latitude and of certain other terms in the components of the momentum equation. An approximate model is here regarded as consistent if it formally preserves conservation principles for axial angular momentum, energy and potential vorticity, and (following R. Müller) if its momentum component equations have Lagrange's form. Within these criteria, four consistent approximate global models, including the HPEs themselves, are identified in a height-coordinate framework. The four models, each of which includes the spherical geopotential approximation, correspond to whether the shallow atmosphere and hydrostatic (or quasi-hydrostatic) approximations are individually made or not made. Restrictions on representing the spatial variation of apparent gravity occur. Solution methods and the situation in a pressure-coordinate framework are discussed. © Crown copyright 2005.

International evidence on the predictability of returns to securitized real estate assets: econometric models versus neural networks

The performance of various statistical models and commonly used financial indicators for forecasting securitised real estate returns are examined for five European countries: the UK, Belgium, the Netherlands, France and Italy. Within a VAR framework, it is demonstrated that the gilt-equity yield ratio is in most cases a better predictor of securitized returns than the term structure or the dividend yield. In particular, investors should consider in their real estate return models the predictability of the gilt-equity yield ratio in Belgium, the Netherlands and France, and the term structure of interest rates in France. Predictions obtained from the VAR and univariate time-series models are compared with the predictions of an artificial neural network model. It is found that, whilst no single model is universally superior across all series, accuracy measures and horizons considered, the neural network model is generally able to offer the most accurate predictions for 1-month horizons. For quarterly and half-yearly forecasts, the random walk with a drift is the most successful for the UK, Belgian and Dutch returns and the neural network for French and Italian returns. Although this study underscores market context and forecast horizon as parameters relevant to the choice of the forecast model, it strongly indicates that analysts should exploit the potential of neural networks and assess more fully their forecast performance against more traditional models.

Optical characterization of the growth and spatial structure of a substorm onset arc

We present a detailed case study of the characteristics of auroral forms that constitute the first ionospheric signatures of substorm expansion phase onset. Analysis of the optical frequency and along-arc (azimuthal) wave number spectra provides the strongest constraint to date on the potential mechanisms and instabilities in the near-Earth magnetosphere that accompany auroral onset and which precede poleward arc expansion and auroral breakup. We evaluate the frequency and growth rates of the auroral forms as a function of azimuthal wave number to determine whether these wave characteristics are consistent with current models of the substorm onset mechanism. We find that the frequency, spatial scales, and growth rates of the auroral forms are most consistent with the cross-field current instability or a ballooning instability, most likely triggered close to the inner edge of the ion plasma sheet. This result is supportive of a near-Earth plasma sheet initiation of the substorm expansion phase. We also present evidence that the frequency and phase characteristics of the auroral undulations may be generated via resonant processes operating along the geomagnetic field. Our observations provide the most powerful constraint to date on the ionospheric manifestation of the physical processes operating during the first few minutes around auroral substorm onset.

Aqueous geochemistry and oxygen isotope compositions of acid mine drainage from the Río Tinto, SW Spain, highlight inconsistencies in current models

The Rio Tinto river in SW Spain is a classic example of acid mine drainage and the focus of an increasing amount of research including environmental geochemistry, extremophile microbiology and Mars-analogue studies. Its 5000-year mining legacy has resulted in a wide range of point inputs including spoil heaps and tunnels draining underground workings. The variety of inputs and importance of the river as a research site make it an ideal location for investigating sulphide oxidation mechanisms at the field scale. Mass balance calculations showed that pyrite oxidation accounts for over 93% of the dissolved sulphate derived from sulphide oxidation in the Rio Tinto point inputs. Oxygen isotopes in water and sulphate were analysed from a variety of drainage sources and displayed delta O-18((SO4-H2O)) values from 3.9 to 13.6 parts per thousand, indicating that different oxidation pathways occurred at different sites within the catchment. The most commonly used approach to interpreting field oxygen isotope data applies water and oxygen fractionation factors derived from laboratory experiments. We demonstrate that this approach cannot explain high delta O-18((SO4-H2O)) values in a manner that is consistent with recent models of pyrite and sulphoxyanion oxidation. In the Rio Tinto, high delta O-18((SO4-H2O)) values (11.2-13.6 parts per thousand) occur in concentrated (Fe = 172-829 mM), low pH (0.88-1.4), ferrous iron (68-91% of total Fe) waters and are most simply explained by a mechanism involving a dissolved sulphite intermediate, sulphite-water oxygen equilibrium exchange and finally sulphite oxidation to sulphate with O-2. In contrast, drainage from large waste blocks of acid volcanic tuff with pyritiferous veins also had low pH (1.7). but had a low delta O-18((SO4-H2O)) value of 4.0 parts per thousand and high concentrations of ferric iron (Fe(III) = 185 mM, total Fe = 186 mM), suggesting a pathway where ferric iron is the primary oxidant, water is the primary source of oxygen in the sulphate and where sulphate is released directly from the pyrite surface. However, problems remain with the sulphite-water oxygen exchange model and recommendations are therefore made for future experiments to refine our understanding of oxygen isotopes in pyrite oxidation. (C) 2009 Elsevier B.V. All rights reserved.

Testing for non-stationarity and cointegration allowing for the possibility of a structural break: an application to EuroSterling interest rates

In this paper we examine the order of integration of EuroSterling interest rates by employing techniques that can allow for a structural break under the null and/or alternative hypothesis of the unit-root tests. In light of these results, we investigate the cointegrating relationship implied by the single, linear expectations hypothesis of the term structure of interest rates employing two techniques, one of which allows for the possibility of a break in the mean of the cointegrating relationship. The aim of the paper is to investigate whether or not the interest rate series can be viewed as I(1) processes and furthermore, to consider whether there has been a structural break in the series. We also determine whether, if we allow for a break in the cointegration analysis, the results are consistent with those obtained when a break is not allowed for. The main results reported in this paper support the conjecture that the ‘short’ Euro-currency rates are characterised as I(1) series that exhibit a structural break on or near Black Wednesday, 16 September 1992, whereas the ‘long’ rates are I(1) series that do not support the presence of a structural break. The evidence from the cointegration analysis suggests that tests of the expectations hypothesis based on data sets that include the ERM crisis period, or a period that includes a structural break, might be problematic if the structural break is not explicitly taken into account in the testing framework.

Comparing projections of future changes in runoff from hydrological and biome models in ISI-MIP

Future changes in runoff can have important implications for water resources and flooding. In this study, runoff projections from ISI-MIP (Inter-sectoral Impact Model Inter-comparison Project) simulations forced with HadGEM2-ES bias-corrected climate data under the Representative Concentration Pathway 8.5 have been analysed for differences between impact models. Projections of change from a baseline period (1981-2010) to the future (2070-2099) from 12 impacts models which contributed to the hydrological and biomes sectors of ISI-MIP were studied. The biome models differed from the hydrological models by the inclusion of CO2 impacts and most also included a dynamic vegetation distribution. The biome and hydrological models agreed on the sign of runoff change for most regions of the world. However, in West Africa, the hydrological models projected drying, and the biome models a moistening. The biome models tended to produce larger increases and smaller decreases in regionally averaged runoff than the hydrological models, although there is large inter-model spread. The timing of runoff change was similar, but there were differences in magnitude, particularly at peak runoff. The impact of vegetation distribution change was much smaller than the projected change over time, while elevated CO2 had an effect as large as the magnitude of change over time projected by some models in some regions. The effect of CO2 on runoff was not consistent across the models, with two models showing increases and two decreases. There was also more spread in projections from the runs with elevated CO2 than with constant CO2. The biome models which gave increased runoff from elevated CO2 were also those which differed most from the hydrological models. Spatially, regions with most difference between model types tended to be projected to have most effect from elevated CO2, and seasonal differences were also similar, so elevated CO2 can partly explain the differences between hydrological and biome model runoff change projections. Therefore, this shows that a range of impact models should be considered to give the full range of uncertainty in impacts studies.

Energy-balance mechanisms underlying consistent large-scale temperature responses in warm and cold climates

Climate simulations show consistent large-scale temperature responses including amplified land–ocean contrast, high-latitude/low-latitude contrast, and changes in seasonality in response to year-round forcing, in both warm and cold climates, and these responses are proportional and nearly linear across multiple climate states. We examine the possibility that a small set of common mechanisms controls these large-scale responses using a simple energy-balance model to decompose the temperature changes shown in multiple lgm and abrupt4 × CO 2 simulations from the CMIP5 archive. Changes in the individual components of the energy balance are broadly consistent across the models. Although several components are involved in the overall temperature responses, surface downward clear-sky longwave radiation is the most important component driving land–ocean contrast and high-latitude amplification in both warm and cold climates. Surface albedo also plays a significant role in promoting high-latitude amplification in both climates and in intensifying the land–ocean contrast in the warm climate case. The change in seasonality is a consequence of the changes in land–ocean and high-latitude/low-latitude contrasts rather than an independent temperature response. This is borne out by the fact that no single component stands out as being the major cause of the change in seasonality, and the relative importance of individual components is different in cold and warm climates.

The option market reaction to bank loan announcements

In this study, we examine the options market reaction to bank loan announcements for the population of US firms with traded options and loan announcements during 1996-2010. We get evidence on a significant options market reaction to bank loan announcements in terms of levels and changes in short-term implied volatility and its term structure, and observe significant decreases in short-term implied volatility, and significant increases in the slope of its term structure as a result of loan announcements. Our findings appear to be more pronounced for firms with more information asymmetry, lower credit ratings and loans with longer maturities and higher spreads. Evidence is consistent with loan announcements providing reassurance for investors in the short-term, however, over longer time horizons, the increase in the TSIV slope indicates that investors become increasingly unsure over the potential risks of loan repayment or uses of the proceeds.

Hydrolysis of N2O5 on sub-micron mineral salt aerosols

The kinetics of reactive uptake of gaseous N2O5 on sub-micron aerosol particles composed of aqueous ammonium sulfate, ammonium hydrogensulfate and sodium nitrate has been investigated. Uptake was measured in a laminar flow reactor, coupled with a differential mobility analyser (DMA) to obtain the aerosol size distribution, with N2O5 detection using NO chemiluminescence. FTIR spectroscopy was used to obtain information about the composition and water content of the aerosol particles under the conditions used in the kinetic measurements. The aerosols were generated by the nebulisation of aqueous salt solutions. The uptake coefficient on the sulfate salts was in the range [gamma]=0.0015 to 0.033 depending on temperature, humidity and phase of the aerosol. On sodium nitrate aerosols the values were much lower, [gamma]<0.001, confirming the inhibition of N2O5 hydrolysis by nitrate ions. At high humidity (>50% r.h.) the uptake coefficient on liquid sulfate aerosols is independent of water content, but at lower humidity, especially below the efflorescence point, the reactivity of the aerosol declines, correlating with the lower water content. The lower uptake rate on solid aerosols may be due to limitations imposed by the liquid volume in the particles. Uptake on sulfate aerosols showed a negative temperature dependence at T>290 K but no significant temperature dependence at lower temperatures. The results are generally consistent with previous models of N2O5 hydrolysis where the reactive intermediate is NO2+ produced by autoionisation of nitrogen pentoxide in the condensed phase.