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Title: Essays on macro-finance and the yield curve
Author: Waters, Alex Dean
Awarding Body: University of Kent
Current Institution: University of Kent
Date of Award: 2013
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This thesis is structured around three essays individual essays and two collaborative pieces of work that examine the relationship between the macroeconomy, financial markets and the term structure of interest rates. Chapter I is an overview- of the most important literature that examines the relationship between the macroeconomy and the term structure of interest rates. I present a small empirical exercise that estimates the unobserved factors of the yield curve with two popular methodologies to fit the yield curve which includes a dynamic Nelson·Siegel model and an affine·term structure model in the form of a three factor Cox, Ingersoll and Ross model and I demonstrate that the factors from each methodology are very similar and that they are correlated with macroeconomic variables. I also show by means of a simple macro-finance model that there are statistically significant relationships between the yield curve factors and the macroeconomic variables that are consistent with the results from the other literature. In Chapter 2 I estimate a fully-fledged macro-finance yield curve model of both the nominal and real forward curve for the UK from 1993 to 2008. The model is able to accommodate a larger number of macroeconomic variables than previously seen in other literature. I use the model to estimate the supply effects from debt issuance on both forward rates and so gauge the impact of Quantitative Easing on forward rates; I find that 10 year nominal interest rates on average are lower by 46 basis points which can largely be explained by the portfolio balance channel, the liquidity premium channel and the signalling channel but there is no statistical impact on the real rates. Chapter 3 presents a way to introduce heterogeneous expectations in a dynamic stochastic general equilibrium model to price the expected path of the short-term interest rate in which different types of agents possess different models that price forward rates. The results suggest with heterogeneous expectations that even a simple three equation New Keynesian model which allows for a certainty equivalent forward curve to be priced from the short-term interest rates, can better match the second moments of US output and inflation and forward rates from 1975 to 2012. The introduction of heterogeneous expectations can also help to explain one of the well known term structure puzzles: the excess volatility puzzle. In Chapter 4, after outlining some of the monetary developments associated with Quantitative Easing (QE), we measure the impact of the UK's initial 2009·10 QE Programme on bonds and other assets. First, we use a macro-finance yield curve both to create a counterfactual path for bond yields and to estimate the impact of QE directly. Second, we analyse the impact of individual QE operations on a range of asset prices. We find that QE significantly lowered government bond yields through the portfolio balance channel - by around 50 or so basis points. We also uncover significant effects of individual operations but limited pass through to other assets. Chapter 5 assesses some of the issues arising from unconventional monetary policy in three separate DSGE models with financial frictions. We find that it is possible to correct for the effects at the zero lower bound in DGSE models by offsetting the liquidity premium embedded in long-term bonds. By adopting counter-cyclical subsidies to bank capital as well as the creation of central bank reserves to reduce the costs of the loan supply.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available