“Financial alchemy” or a zero sum game? Real estate finance, securitisation and the UK property market

Following the US model, the UK has seen considerable innovation in the funding, finance and procurement of real estate in the last decade. In the growing CMBS market asset backed securitisations have included $2.25billion secured on the Broadgate office development and issues secured on Canary Wharf and the Trafford Centre regional mall. Major occupiers (retailer Sainsbury’s, retail bank Abbey National) have engaged in innovative sale & leaseback and outsourcing schemes. Strong claims are made concerning the benefits of such schemes – e.g. British Land were reported to have reduced their weighted cost of debt by 150bp as a result of the Broadgate issue. The paper reports preliminary findings from a project funded by the Corporation of London and the RICS Research Foundation examining a number of innovative schemes to identify, within a formal finance framework, sources of added value and hidden costs. The analysis indicates that many of the gains claimed conceal costs – in terms of market value of debt or flexibility of management – while others result from unusual firm or market conditions (for example utilising the UK long lease and the unusual shape of the yield curve). Nonetheless, there are real gains resulting from the innovations, reflecting arbitrage and institutional constraints in the direct (private) real estate market

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.

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 the random walk hypothesis with variance ratio statistics

Mestrado em Finanças

Yield-factor volatility models

The term structure of interest rates is often summarized using a handful of yield factors that capture shifts in the shape of the yield curve. In this paper, we develop a comprehensive model for volatility dynamics in the level, slope, and curvature of the yield curve that simultaneously includes level and GARCH effects along with regime shifts. We show that the level of the short rate is useful in modeling the volatility of the three yield factors and that there are significant GARCH effects present even after including a level effect. Further, we find that allowing for regime shifts in the factor volatilities dramatically improves the model’s fit and strengthens the level effect. We also show that a regime-switching model with level and GARCH effects provides the best out-of-sample forecasting performance of yield volatility. We argue that the auxiliary models often used to estimate term structure models with simulation-based estimation techniques should be consistent with the main features of the yield curve that are identified by our model.

The ‘Visible Hand’ of the ECB’s Quantitative Easing. CEPS Working Document No. 407/May 2015

Quantitative easing à la ECB has produced so far an impact on long-term nominal rates through ex ante channels: signalling channels, term duration channels, and risk premia channels. The term duration channel will also lead to a lengthening of the average maturity of government debts, with possible implications for fiscal policy. The ECB’s determination to buy government bonds in a fragmented market with a low net supply may also produce an ex post impact, during the actual asset purchases, but less on nominal rates and more on financial plumbing, as recent volatility suggests. As the effects of scarce supply in collateral markets are felt, repo rates remain well below zero. Lower supply and limited re-usability of high quality collateral, capped by regulatory requirements, is a constraint on market liquidity and compresses dealers’ balance sheets. By keeping a depressed yield curve and asset prices high, QE may also accelerate the consolidation of both traditional and capital-market based (dealer) bank business models. What is less clear is how these changing business models will interact with the sharp rise of the asset management industry in the aftermath of the crisis, which raises questions about the implications for global collateral flows and deposit-like funding channels.

An empirical investigation of the level effect in Australian interest rates

An extensive literature examines the dynamics of interest rates, with particular attention given to the positive relationship between interest-rate volatility and the level of interest rates—the so-called level effect. This paper examines the interaction between the estimated level effect and competing parameterisations of interest-rate volatility for the Australian yield curve. We adopt a new methodology that estimates elasticity in a multivariate setting that explicitly accommodates the correlations that exist between various yield factors. Results show that significant correlations exist between the residuals of yield factors and that such correlations do indeed impact on model estimates. Within the multivariate setting, the level of the short rate is shown to be a crucial determinant of the conditional volatility of all three yield factors. Measures of model fit suggest that, in addition to the usual level effect, the incorporation of GARCH effects and possible regime shifts is important

The differential impact of monetary policy announcements and explanatory minutes releases on the Australian interest rate futures market

Unlike US and Continental European jurisdictions, Australian monetary policy announcements are not followed promptly by projections materials or comprehensive summaries that explain the decision process. This information is disclosed 2 weeks later when the explanatory minutes of the Reserve Bank board meeting are released. This paper is the first study to exploit the features of the Australian monetary policy environment in order to examine the differential impact of monetary policy announcements and explanatory statements on the Australian interest rate futures market. We find that both monetary policy announcements and explanatory minutes releases have a significant impact on the implied yield and volatility of Australian interest rate futures contracts. When the differential impact of these announcements is examined using the full sample, no statistically significant difference is found. However, when the sample is partitioned based on stable periods and the Global Financial Crisis, a differential impact is evident. Further, contrary to the findings of Kim and Nguyen (2008), Lu et al. (2009), and Smales (2012a), the response along the yield curve, is found to be indifferent between the short and medium terms.

Yielding of sensitive clays: micromechanical considerations

Test results reported on several natural sensitive soils show significant anisotropy of the yield curves, which are generally oriented along the coefficient of earth pressure at rest (K-0) axis. An attempt is made in this paper to explain the anisotropy in yielding from microstructural considerations. An elliptic pore, with particle domains aligned along the periphery of the pore, and with the major axis of the pore being oriented along the direction of the in situ major principal stress, is chosen as the unit of microstructure. An analysis of forces at the interdomain contacts around the ellipse is carried out with reference to experimentally determined yield stress conditions of one soil, and a yield criteria is defined. The analysis, with the proposed yield criteria, enables one to define the complete yield curve for any other soil from the results of only two tests (one constant eta compression test with eta close to eta(K?0), where eta is the stress ratio (= q/p) and eta(K?0) is the stress ratio corresponding to anisotropic K-0 compression, and another undrained shear test). Predicted yield curves are compared with experimental yield curves of several soils reported in the literature.

On the mechanical behavior of compacted pack ice : A theoretical and numerical investigation

Pack ice is an aggregate of ice floes drifting on the sea surface. The forces controlling the motion and deformation of pack ice are air and water drag forces, sea surface tilt, Coriolis force and the internal force due to the interaction between ice floes. In this thesis, the mechanical behavior of compacted pack ice is investigated using theoretical and numerical methods, focusing on the three basic material properties: compressive strength, yield curve and flow rule. A high-resolution three-category sea ice model is applied to investigate the sea ice dynamics in two small basins, the whole Gulf Riga and the inside Pärnu Bay, focusing on the calibration of the compressive strength for thin ice. These two basins are on the scales of 100 km and 20 km, respectively, with typical ice thickness of 10-30 cm. The model is found capable of capturing the main characteristics of the ice dynamics. The compressive strength is calibrated to be about 30 kPa, consistent with the values from most large-scale sea ice dynamic studies. In addition, the numerical study in Pärnu Bay suggests that the shear strength drops significantly when the ice-floe size markedly decreases. A characteristic inversion method is developed to probe the yield curve of compacted pack ice. The basis of this method is the relationship between the intersection angle of linear kinematic features (LKFs) in sea ice and the slope of the yield curve. A summary of the observed LKFs shows that they can be basically divided into three groups: intersecting leads, uniaxial opening leads and uniaxial pressure ridges. Based on the available observed angles, the yield curve is determined to be a curved diamond. Comparisons of this yield curve with those from other methods show that it possesses almost all the advantages identified by the other methods. A new constitutive law is proposed, where the yield curve is a diamond and the flow rule is a combination of the normal and co-axial flow rule. The non-normal co-axial flow rule is necessary for the Coulombic yield constraint. This constitutive law not only captures the main features of forming LKFs but also takes the advantage of avoiding overestimating divergence during shear deformation. Moreover, this study provides a method for observing the flow rule for pack ice during deformation.

On the Magnetic Ground State of La(0.85)Sr(0.15)CoO(3) Single Crystals

We present an extensive study on magnetic and transport properties of La(0.85)Sr(0.15)CoO(3) single crystals grown by a float zone method to address the issue of phase separation versus spin-glass (SG) behavior. The dc magnetization study reveals a kink in field-cooled magnetization, and the peak in the zero-field-cooling curve shifts to lower temperature at modest dc fields, indicating the SG magnetic phase. The ac susceptibility study exhibits a considerable frequency-dependent peak shift (similar to 4 K) and a time-dependent memory effect below the freezing temperature. In addition, the characteristic time scale tau(0) estimated from the frequency-dependent ac susceptibility measurement is found to be similar to 10(-13) s, which matches well with typical values observed in canonical SG systems. The transport relaxation study evidently demonstrates the time-dependent glassy phenomena. In essence, all our experimental results corroborate the existence of SG behavior in La(0.85)Sr(0.15)CoO(3) single crystals.

Prediction of extension test results of soft cemented clays with a simple constitutive model

In the present paper, the constitutive model is proposed for cemented soils, in which the cementation component and frictional component are treated separately and then added together to get overall response. The modified Cam clay is used to predict the frictional resistance and an elasto-plastic strain softening model is proposed for the cementation component. The rectangular isotropic yield curve proposed by Vatsala (1995) for the bond component has been modified in order to account for the anisotropy generally observed in the case of natural soft cemented soils. In this paper, the model proposed is used to predict the experimental results of extension tests on the soft cemented soils whereas compression test results are presented elsewhere. The model predictions compare quite satisfactorily with the observed response. A few input parameters are required which are well defined and easily determinable and the model uses associated flow rule.

Aplicación del análisis de componentes principales a la inmunización financiera: el caso del mercado español de deuda pública

This work is licensed under a Creative Commons Attribution 3.0 License.