A two-factor model of the U.K. yield curve

I model the forward premium in the U.K. gilt-edged market over the period 1982–96 using a two-factor general equilibrium model of the term structure of interest rates. The model permits the decomposition of the forward premium into separate components representing interest rate expectations, the risk premia associated with each of the underlying factors, and terms capturing the direct impact of the variances of the factors on the shape of the forward curve.

Econometrics of yield spreads in the money market:a note

The literature on bond markets and interest rates has focused largely on the term structure of interest rates, specifically, on the so-called expectations hypothesis. At the same time, little is known about the nature of the spread of the interest rates in the money market beyond the fact that such spreads are generally unstable. However, with the evolution of complex financial instruments, it has become imperative to identify the time series process that can help one accurately forecast such spreads into the future. This article explores the nature of the time series process underlying the spread between three-month and one-year US rates, and concludes that the movements in this spread over time is best captured by a GARCH(1,1) process. It also suggests the use of a relatively long term measure of interest rate volatility as an explanatory variable. This exercise has gained added importance in view of the revelation that GARCH based estimates of option prices consistently outperform the corresponding estimates based on the stylized Black-Scholes algorithm.

Capital markets and the market structure of foreign investments

Contrary to the long-received theory of FDI, interest rates or rates of return can motivate foreign direct investment (FDI) in concert with the benefits of direct ownership. Thus, access to investor capital and capital markets is a vital component of the multinational’s competitive market structure. Moreover, multinationals can use their superior financial capacity as a competitive advantage in exploiting FDI opportunities in dynamic markets. They can also mitigate higher levels of foreign business risks under dynamic conditions by shifting more financial risk to creditors in the host economy. Furthermore, the investor’s expectation of foreign business risk necessarily commands a risk premium for exposing their equity to foreign market risk. Multinationals can modify the profit maximization strategy of their foreign subsidiaries to maximize growth or profits to generate this risk premium. In this context, we investigate how foreign subsidiaries manage their capital funding, business risk, and profit strategies with a diverse sample of 8,000 matched parents and foreign subsidiary accounts from multiple industries in 38 countries.We find that interest rates, asset prices, and expectations in capital markets have a significant effect on the capital movements of foreign subsidiaries. We also find that foreign subsidiaries mitigate their exposure to foreign business risk by modifying their capital structure and debt maturity. Further, we show how the operating strategy of foreign subsidiaries affects their preference for growth or profit maximization. We further show that superior shareholder value, which is a vital link for access to capital for funding foreign expansion in open market economies, is achieved through maintaining stability in the rate of growth and good asset utilization.

Forecasting the term structure when short-term rates are near zero

This paper compares the experience of forecasting the UK government bond yield curve before and after the dramatic lowering of short-term interest rates from October 2008. Out-of-sample forecasts for 1, 6 and 12 months are generated from each of a dynamic Nelson-Siegel model, autoregressive models for both yields and the principal components extracted from those yields, a slope regression and a random walk model. At short forecasting horizons, there is little difference in the performance of the models both prior to and after 2008. However, for medium- to longer-term horizons, the slope regression provided the best forecasts prior to 2008, while the recent experience of near-zero short interest rates coincides with a period of forecasting superiority for the autoregressive and dynamic Nelson-Siegel models. © 2014 John Wiley & Sons, Ltd.

Testing term structure estimation methods:evidence from the UK STRIPs market

Prices and yields of UK government zero-coupon bonds are used to test alternative yield curve estimation models. Zero-coupon bonds permit a more pure comparison, as the models are providing only the interpolation service and also not making estimation feasible. It is found that better yield curves estimates are obtained by fitting to the yield curve directly rather than fitting first to the discount function. A simple procedure to set the smoothness of the fitted curves is developed, and a positive relationship between oversmoothness and the fitting error is identified. A cubic spline function fitted directly to the yield curve provides the best overall balance of fitting error and smoothness, both along the yield curve and within local maturity regions.

Effect of cooling rate on intercritically reheated microstructure and toughness in high strength low alloy steel

High strength low alloy steels have been shown to be adversely affected by the existence of regions of poor impact toughness within the heat affected zone (HAZ) produced during multipass welding. One of these regions is the intercritically reheated coarse grained HAZ or intercritical zone. Since this region is generally narrow and discontinuous, of the order of 0.5 mm in width, weld simulators are often employed to produce a larger volume of uniform microstructure suitable for toughness assessment. The steel usedfor this study was a commercial quenched and tempered steel of 450 MN m -2 yield strength. Specimen blanks were subjected to a simulated welding cycle to produce a coarse grained structure of upper bainite during the first thermal cycle, followed by a second thermal cycle where the peak temperature T p2 was controlled. Charpy tests carried out for T p2 values in the range 650-850°C showed low toughness for T p2 values between 760 and 790°C, in the intercritical regime. Microstructural investigation of the development of grain boundary martensite-retained austenite (MA) phase has been coupled with image analysis to measure the volume fraction of MAformed. Most of the MA constituent appears at the prior austenite grain boundaries during intercritical heating, resulting in a 'necklace' appearance. For values of T p2 greater than 790°C the necklace appearance is lost and the second phase areas are observed throughout the structure. Concurrent with this is the development of the fine grained, predominantly ferritic structure that is associated with the improvement in toughness. At this stage the microstructure is transforming from the intercritical regime structure to the supercritically reheated coarse grained HAZ structure. The toughness improvement occurs even though the MA phase is still present, suggesting that the embrittlement is associated with the presence of a connected grain boundary network of the MA phase. The nature of the second phase particles can be controlled by the cooling rate during the second cycle and variesfrom MA phase at high cooling rates to a pearlitic structure at low cooling rates. The lowest toughness of the intercritical zone is observed only when MA phase is present. The reason suggested for this is that only the MA particles debond readily, a number of debonded particles in close proximity providing sufficient stress concentration to initiate local cleavage. © 1993 The Institute of Materials.

Short-horizon excess returns and exchange rate and interest rate effects

stocks. We examine the effects of foreign exchange (FX) and interest rate changes on the excess returns of U.S. stocks, for short-horizons of 1-40 days. Our new evidence shows a tendency for the volatility of both excess returns and FX rate changes to be negatively related with FX rate and interest rate effects. Both the number of firms with significant FX rate and interest rate effects and the magnitude of their exposures increase with the length of the return horizon. Our finding seems inconsistent with the view that firms hedge effectively at short-return horizons.

Long-term efficacy of orthokeratology contact lens wear in controlling the progression of childhood myopia

Purpose: The primary outcome of this study is to compare the axial length growth of white European myopic children wearing orthokeratology contact lenses (OK) to a control group (CT) over a 7-year period. Methods: Subjects 6–12 years of age with myopia −0.75 to −4.00DS and astigmatism ≤1.00DC were prospectively allocated OK or distance single-vision spectacles (SV) correction. Measurements of axial length (Zeiss IOLMaster), corneal topography, and cycloplegic refraction were taken at 6-month intervals over a 2-year period. Subjects were invited to return to the clinic approximately 5 years later (i.e., 7 years after the beginning of the study) for assessment of their ocular refractive and biometric components. The CT consisted of 4 SV and 12 subjects who switched from SV to soft contact lens wear after the initial 2 years of SV lens wear. Changes in axial length relative to baseline over a 7-year period were compared between groups. Results: Fourteen and 16 subjects from the OK and CT groups, respectively, were examined 6.7 ± 0.5 years after the beginning of the study. Statistically significant changes in the axial length were found over time and between groups (both p <0.001), but not for the time*group interaction (p = 0.125). The change in the axial length for the OK group was 22% (p = 0.328), 42% (p = 0.007), 40% (p = 0.020), 41% (p = 0.013), and 33% (p = 0.062) lower than the CT group following 6, 12, 18, 24, and 84 months of lens wear, respectively. Conclusion: A trend toward a reduction in the rate of axial elongation of the order of 33% was found in the OK group in comparison to the CT group following 7 years of lens wear.