Eliseo Navarro

Yield Spread and Term to Maturity: Default vs. Liquidity

The aim of this paper is the analysis of the yield spreads between Treasury and non–Treasury Spanish fixed income assets and its relationship with the term to maturity. We find a downward sloping term structure of yield spreads for investment–grade bonds that seems to be contrary to the ‘crisis at maturity’ theory. However, we claim that this outcome is caused mainly by the effect of liquidity on yield spreads. Once the effect of liquidity and other factors are removed we find that there is a positive relationship between default premiums and term to maturity. That result is now consistent with the existing literature.

The structure of spot rates and immunization: Some further results

Abstract. This paper estimates and tests a two-factor model of the term structure of interest rates based on the methodology developed by Elton, Gruber and Michaelly (1990) in an APT context. The model is then enlarged to allow its use for interest rate risk measurement through a duration vector. The results of the model using in-sample data are consistent with those obtained by Principal Components Analysis to explain the term structure behaviour. Finally, the model is tested using out-of-sample data, showing its superiority over a competing model based on the traditional Macaulays duration.

Term structure of volatilities and yield curve estimation methodology

In this paper, we estimate the term structure of interest rate volatilities. It is well known that volatility is the main input for option and other fixed income derivatives valuation models. However, we find that volatility estimates depend significantly on the model used to estimate the zero coupon yield curve (Nelson and Siegel; Vasicek and Fong) and the assumption concerning the heteroskedasticity structure of errors (OLS or GLS weighted by duration). We conclude in our empirical analysis that there are significant differences between these volatility estimates in the short term (less than one year) and in the long term (more than 10 years).

Estimating the volatility term structure

In this paper, we proceed to estimate term structure of interest rate volatilities, finding that these estimates depend significantly on the model used to estimate the term structure (Nelson and Siegel or Vasicek and Fong) and the heteroscedasticity structure of errors (OLS or GLS weighted by duration). We conclude in our empirical analysis that there are significant differences between these volatilities in the short (less than one year) and long term (more than ten years). Finally, we can detect that three principal components explain 90% of the changes in volatility term structure. These components are related to level, slope and curvature.

European Inflation and the Spanish Stock Market

This study examines the short-run response of daily stock prices in the Spanish market to the announcements of inflation news at a sector level at the moments when the Spanish authorities announce the IPC (consumer price index) during the period 1995-2004. The study also incorporates two novel explanatory variables: core inflation and “non-core” inflation rate components on the one hand, and the spread between the Spanish and European inflation rates (harmonized) on the other hand. Conclusions of the study: the “non-core” component of the inflation rate, which is more volatile, has negative effects on some sector returns; additionally, in drawing too far apart from the European inflation rate, the Spanish inflation rate negatively affects sector returns, such as in the “Consumer Goods” sector, which is subject to strong foreign competition. In the long-term analysis, the lagged core inflation (structural component) negatively affects sector returns.