Taking Positive Interest Rates Seriously

Enlin Pan and Liuren Wu
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Enlin Pan: Chicago Partners, LLC, USA

Chapter 14 in Advances in Quantitative Analysis of Finance and Accounting, 2006, pp 327-356 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractWe present a dynamic term structure model in which interest rates of all maturities are bounded from below at zero. Positivity and continuity, combined with no arbitrage, result in only one functional form for the term structure with three sources of risk. We cast the model into a state-space form and extract the three sources of systematic risk from both the US Treasury yields and the US dollar swap rates. We analyze the different dynamic behaviors of the two markets during credit crises and liquidity squeezes.

Keywords: Earnings Management; Management Compensation; Option Theory and Application; Debt Management and Interest Rate Theory; Portfolio Diversification; Earnings Surprise (search for similar items in EconPapers)
Date: 2006
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Working Paper: Taking Positive Interest Rates Seriously (2004)
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