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1 – 10 of over 197000Low interest rates around the world due to adaptive monetary policy regulations for some time a source of concern for the banking sector and depositors of the bank. In this…
Abstract
Low interest rates around the world due to adaptive monetary policy regulations for some time a source of concern for the banking sector and depositors of the bank. In this environment, interest rates have raised concerns about nominal deposit interest rates which cannot be lowered below zero without destroying bank customers. Bank loans are becoming less vulnerable to lower interest rates on deposits approaching zero, indicating that the financial channel is weakened when interest rates are close to zero. Demographic pressures associated with longer life expectancy, China's gradual integration into global financial markets and changes in supply and asset requirements are attributed as reasons for low interest rates. Volatility of CPI inflation, interest rates on bank deposits attracting income tax and discontented depositors due to lower rates are cited as reasons for the suffering of bank depositors. This chapter thus discusses the impact of negative rate on economic growth and bank customers besides discussing the future trends of negative interest rates.
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Vector‐autoregression (VAR), integration, and cointegration models are used to investigate the causal relations, dynamic interaction, and a common trend between interest rates and…
Abstract
Vector‐autoregression (VAR), integration, and cointegration models are used to investigate the causal relations, dynamic interaction, and a common trend between interest rates and inflation in nine countries in the Pacific‐Basin. This paper finds that for all countries, short‐ and long‐term interest rates and the spread between the long‐term interest rates and inflation are non‐stationary I (1) processes. The nominal interest rates and inflation are not co‐integrated. In addition to this study’s inability to find a unidirectional causality between inflation and interest rates, when the VAR model is used, it also fails to find a consistent positive response either of inflation to shocks in interest rates or of interest rates to shocks in inflation in most of the countries studied. The VAR model results are consistent with the cointegration tests’ results, that is, nominal interest rates are poor predictors for future inflation in the Pacific‐Basin countries.
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J. PAUL JOSHI and LARRY SWERTLOFF
The advent of derivatives and structured products has coincided with a proliferation of fixed income models used to analyze hedging, pricing, forecasting, and estimation for the…
Abstract
The advent of derivatives and structured products has coincided with a proliferation of fixed income models used to analyze hedging, pricing, forecasting, and estimation for the term structure of interest rates. This article evaluates five models Ho‐Lee (HL); Black‐Derman‐Toy (BDT); Vasicek; Cox‐Ingersoll‐Ross (CIR); and Heath‐Jarrow‐Morton (HJM) (see Exhibit 1) that are currently used by structured finance practitioners. We suggest which models are most appropriate for assets with different time horizons, interest rate sensitivities and cashflow properties. The authors link model selection to structured financial instruments with the singular focus on the trade‐off between model precision/complexity and calculation costs.
Raymond A.K. Cox and Rose M. Prasad
The values of assets and liabilities of financial institutions are subject to fluctuations in interest rate. The differential impact in interest rate changes between assets and…
Abstract
The values of assets and liabilities of financial institutions are subject to fluctuations in interest rate. The differential impact in interest rate changes between assets and liabilities is referred to, in banking, as interest rate risk. Of all threats to bank competitiveness this risk dwarfs all others. Banks traditionally have dealt with interest rate risk by restructuring their loan portfolios. In this paper, we construct a model to measure interest rate risk, called the Degree of Interest Rate Sensitivity (DIRS), and demonstrate its effectiveness for banks to compete. The degree of interest rate risk is of vital importance to the commercial bank which has to know its level and degree of interest‐rate risk in order to prudently manage it. Failure to adequately manage interest rate risk can lead to bankruptcy or, at the least, a lack of competitiveness.
This study seeks to investigate the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies…
Abstract
Purpose
This study seeks to investigate the sensitivity of stock returns at the industry level to market, exchange rate and interest rate shocks in the four major European economies: France, Germany, Italy, and the UK.
Design/methodology/approach
The paper utilises the methodology of Campbell and Mei (1993) to decompose systematic risks into components attributable to news about future dividends (cash flows), real interest rates and excess returns.
Findings
In addition to significant market risk, the paper finds significant levels of exposure to exchange rate risk in industries in all four markets. Significant levels of interest rate risk are only identified in Germany and France. All three sources of risk contain significant information about future cash flows and excess returns.
Research limitations/implications
Future research could investigate the extent of exposure in other markets, or investigate whether the findings change at the firm level. Additionally it could be investigated whether recent asset pricing work such as Campbell and Vuolteenaho (2004) can be utilised to investigate this research problem.
Practical implications
The paper identifies which industry portfolios have significant exposures and decomposes these risks. This information is relevant for investors and portfolio managers, as well as financial management within the firm.
Originality/value
The paper utilises an alternative econometric methodology to investigate the extent of exposure to exchange rate and interest risks in industrial portfolios in four European markets.
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This paper aims to analyze Islamic rates of return, conventional interest rates in the Malaysian deposit markets, and Kuala Lumpur Interbank Offered Rate (KLIBOR) rates in the…
Abstract
Purpose
This paper aims to analyze Islamic rates of return, conventional interest rates in the Malaysian deposit markets, and Kuala Lumpur Interbank Offered Rate (KLIBOR) rates in the short-term money market from the view point of co-movement and transmission.
Design/methodology/approach
The non-stationary time series models such as cointegration and Granger causality tests are applied to analyze the daily data.
Findings
Islamic rates of return and conventional interest rates co-move in the Malaysian deposit market. The Islamic rates of return propel conventional interest rates in the three-, six-, and 12-month maturities. Islamic rates of return and conventional interest rates form a short-term money market with KLIBOR rates.
Research limitations/implications
The author analyzes econometrically the sample period from May 16, 2005 to January 12, 2012. This paper concentrates on the period after the development of Islamic banking in Malaysia.
Practical implications
Islamic and conventional deposit markets are competitive in Malaysia; in particular, the competition in the one-month deposit market is very keen. Islamic rates of return have more impact on the formation of short-term interest rates than conventional interest rates.
Originality/value
This paper makes three contributions to the related literatures. First, it uses daily data in the maturities of one month, three months, six months and 12 months for its analyses. Second, it uses the Granger causality method of Toda and Yamamoto to avoid the issue of the non-stationarity of the data. The results of the Granger causality tests in this paper are different from related literatures. Third, this paper focuses on the relationship of KLIBOR rates and Islamic rates of return, and of KLIBOR rates and conventional interest rates.
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Major financial lease contracts are commonly written on a variable interest rate basis. The conditions of this sort of lease include an interest rate variation clause which…
Abstract
Major financial lease contracts are commonly written on a variable interest rate basis. The conditions of this sort of lease include an interest rate variation clause which provides for adjustments to be made to the rentals when interest rates change. Such adjustments are usually made periodically by applying the change in the interest rate (from the rate at the beginning of the lease) to the amount of the lessor's investment in the lease.
Richard Cebula and Usha Nair-Reichert
This study investigates the impact of federal income tax rates and budget deficits on the nominal interest rate yield on high-grade municipal tax-free bonds (municipals) in the…
Abstract
Purpose
This study investigates the impact of federal income tax rates and budget deficits on the nominal interest rate yield on high-grade municipal tax-free bonds (municipals) in the US. The 58-year study period covers the years 1959 through 2016 and thus is very recent.
Design/methodology/approach
The study develops a loanable funds model that allows for various financial market factors. Once developed, the model is estimated by autoregressive two-stage least squares, with a Newey-West heteroskedasticity correction.
Findings
The nominal interest rate yield on municipals is a decreasing function of the maximum marginal federal personal income tax rate and an increasing function of the federal budget deficit (expressed as a per cent of GDP). This yield is also an increasing function of nominal interest rate yields on three- and ten-year treasury notes and expected inflation.
Research limitations/implications
When introducing additional interest rates such as treasury bills as explanatory variables, multi-collinearity becomes a serious problem.
Practical implications
This study indicates that lower maximum federal personal income tax rates and larger federal budget deficits, both act to raise borrowing costs for cities (of all sizes), counties and states across the country. Given the study period of 58 years, these relationships appear to be enduring ones that responsible policy-makers should not overlook.
Social implications
Tax reform and debt management need to be conducted in a very circumspect fashion.
Originality/value
No recent study investigating the impact of the two key policy variables in this study has been published.
This paper derives the optimal monetary policy under discretion, taking into account that aggregate spending depends on the long‐term real interest rate rather than on the…
Abstract
This paper derives the optimal monetary policy under discretion, taking into account that aggregate spending depends on the long‐term real interest rate rather than on the short‐term rate. It deduces optimal shock‐dependent strategies for the monetary instrument, the nominal interest rate and analyzes the influence of both the degree of persistence of supply and demand shocks and the weight on output stabilization in the objective function of the central bank on the optimal monetary reaction. The higher the degree of persistence of a supply shock, the stronger is the reaction of the interest rate, whereas the opposite holds for a demand shock. The reaction on demand disturbances is independent of weight given to output stabilization by the central bank; in the case of a supply shock the reaction of the interest rate depends on this weight.
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Mark J. Holmes and Eric J. Pentecost
Investigates the hypothesis of increased financial integration within the European Union (EU) based on an examination of covered and nominal interest rate differentials between…
Abstract
Investigates the hypothesis of increased financial integration within the European Union (EU) based on an examination of covered and nominal interest rate differentials between March 1979 and August 1992 using cointegration and time‐varying parameter econometric techniques. Discovers evidence of increased financial integration from about 1983, although this is not universal for all countries within the EU. In particular the UK seems to have more financial independence, perhaps reflecting its non‐membership of the exchange rate mechanism, while Belgium is the country most closely tied to German monetary policy.
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