Low-frequency volatility of yen interest rate swap market in relation to macroeconomic risk

Using ‘low-frequency’ volatility extracted from aggregate volatility shocks in interest rate swap (hereafter, IRS) market, this paper investigates whether Japanese yen IRS volatility can be explained by macroeconomic risks. The analysis suggests that this low-frequency yen IRS volatility has strong and positive association with most of the macroeconomic risk proxies (e.g., volatility of consumer price index, industrial production volatility, foreign exchange volatility, slope of the term structure and money supply) with the exception of the unemployment rate, which is negatively related to IRS volatility. This finding is fairly consistent with the argument that the greater the macroeconomic risk the greater is the use of derivative instruments to hedge or speculate. The relationship between the macroeconomic risks and IRS volatility varies slightly across the different swap maturities but is robust to alternative volatility specifications. This linkage between swap market and macroeconomy has practical implications since market makers and hedgers use the swap rate as benchmark for pricing long-term interest rates, corporate bonds and various other securities.

Australian and US interest rate swap markets : comparison and linkages

We investigate and compare the determinants of US and Australian interest rate swap spreads and the linkages between these markets. The slope of the risk-free term structure is the most significant determinant and its importance is greater for longer terms to maturity. Interest rate levels and, in Australia, the default premium also have some impact. The influences of interest rate volatility, the liquidity premium and (in the USA) the default premium are small or negligible. We hypothesise, and our evidence confirms, that the US swap market significantly affects the Australian swap market but not vice-versa.

National consumer credit laws, financial exclusion and interest rate caps : The case for diversity within a centralised framework

Australia is going through a major reform of consumer credit regulation, with the implementation of a proposal to transfer regulatory responsibility from the State and Territory Governments to the Commonwealth Government. While the broad policy approach is supported, the reform process has missed a significant opportunity to engage directly with issues of financial exclusion and with the potential role of regulation to reduce financial exclusion. The imposition of an interest rate cap can limit the impact of financial exclusion. However, the future of the existing interest rate caps is uncertain, given the diversity of approaches, and the heated debate that surrounds this issue. In the absence of support for regulatory initiatives to increase the availability of low cost, small loans, permitting regulatory diversity on this issue of interest rate caps, within an otherwise centralised regulatory framework., can minimise the impact of financial exclusion on consumers.

Interest rate caps : protection or paternalism

In a context where over-indebtedness and financial exclusion have been recognised as problems in Australia, it is undesirable that those who can least afford it, pay a high cost for short-term consumer credit. Evidence points to an increase in consumer debt in Australia and consequential over-indebtedness which has been shown to lead to a wide range of social problems.2 There is also evidence of financial exclusion, where consumers suffer a lack of access to mainstream financial services, and in Australia this is particularly the case with regard to access to safe and affordable credit.3 Financial exclusion can only exacerbate over-indebtedness, given that financially excluded, predominantly low income consumers , have been shown to turn to high cost credit to meet their short term credit needs. This is a problem that has been explored most recently in the Victorian Consumer Credit Review...

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.

Structured products in the current low interest rate environment

Directed Research Internship

Prediction of the economic activity from the short and long-term interest rate differential: new evidences in Chile and the United States of America cases

The purpose of this work is to verify the stability of the relationship between real activity and interest rate spread. The test is based on Chen (1988) and Osorio and Galea (2006). The analysis is applied to Chile and the United States, from 1980 to 1999. In general, in both cases the relationship was statistically significant in early 80s, but a break point is found in both countries during that decades, suggesting that the relationship depends on the monetary rule follow by the Central Bank.