Liquidity, Term Spreads and Monetary Policy

Abstract

We propose a model with segmented markets that delivers endogenous variations in term spreads driven by banks' portfolio decisions while facing maturity risk. This predictive power stems from the relation between the slope of the yield curve and the future path of short-term interest rates, and also, from variations in term spreads. While there is * Corresponding

Measuring the impact of monetary policy attention on global asset volatility using search data

“…Based on the results of the second stage, given in tables 4, 9 and 10, policy shocks have a significant impact on the on the volatility of domestic corporate bonds, providing evidence for portfolio-rebalancing. This is in line with the preferred-habitat literature, as well as Aksoy and Basso (2014), who emphasise the effect of banks' portfolio-choice on term-spreads in a general-equilibrium setting. There is further evidence for international transmission of volatility on money and corporate bond markets, whilst there is no conclusive evidence on government bond markets.…”

The Central Bank Balance Sheet as a Policy Tool: Past, Present and Future

“…As the title of Wallace's paper highlights, his results are in turn a variant of the Modigliani-Miller theorem (that the value of a firm is unaffected by the composition of its liabilities) applied to public sector liabilities. 17 There is relatively little theoretical literature on the role of reserves and money per se in transmitting the effects of QE Aksoy and Basso (2014). andReis (2017) present models in which QE operates via the increase in interest-bearing reserves held by commercial banks.…”

“…andReis (2017) present models in which QE operates via the increase in interest-bearing reserves held by commercial banks. An increase in reserves dilutes the overall risk of bank portfolios InAksoy and Basso (2014), this occurs via a reduction in liquidity risk. InReis (2017), additional reserves cushion the effects of an increase in sovereign default risk Christensen and Krogstrup (2016).…”

Predictive power of Markovian models: Evidence from US recession forecasting

“…Ang, Piazzesi, and Wei () build a model to predict GDP growth using information across the whole yield curve rather than only the long maturity segment. Aksoy and Basso () explore the economic link between expected financial profitability and yield spreads and analyze an unconventional monetary policy that affects yield curve through banks' portfolio choices.Haubrich and Dombrosky () document the decline in the yield curve's ability to predict recessions and economic activity over the decade 1985–1995. While Rudebusch and Williams () point out that although “during the past 20 years,” “signals from the yield curve have often been dismissed because of supposed changes in the economy or special factors influencing interest rates,” “the puzzling power of the yield curve to predict recessions appears to have endured.” They show that the yield spread forecasts are significantly more accurate than the SPF (Survey of Professional Forecasters) forecasts at horizons of three quarters and longer.The reasons for the predictive power of the yield spread are fourfold: the preferred habitat hypothesis, the impact of monetary policies, risk premium effect, and intertemporal consumption smoothing.…”

“…Ang, Piazzesi, and Wei () build a model to predict GDP growth using information across the whole yield curve rather than only the long maturity segment. Aksoy and Basso () explore the economic link between expected financial profitability and yield spreads and analyze an unconventional monetary policy that affects yield curve through banks' portfolio choices.…”