Doctoral thesis

Monetary policy and interest rate products


116 p

Thèse de doctorat: Università della Svizzera italiana, 2019

English My PhD thesis consists of three papers which study how interest rate products' prices react to both the central bank's policy goals and communication. As tool I make use of various econometric techniques such as affine models, general method of moments or Haar like filtering. The first chapter studies government bond excess term premia. I show that their predictability is driven by monetary policy. The long term impact of the central bank actions on risk free bonds returns are examined via a study of one year holding period for bond excess returns. The analysis demonstrates that the premia predictability increases for the bond maturities closer to respective central bank policy goals. I decompose macroeconomic data into transitory and persistent components of various frequencies to model monetary policy. I accommodate two effects in the single MP factor: slow persistent long term relation and short exogenous shocks, which produce a significant predictive power of bond excess returns. The second chapter focuses on the direct impact of Federal Open Market Committee meetings and policy announcements on the corporate bond market. In the case of FOMC announcements we obtain the probability of a good state, using 30-day Fed Funds futures transaction prices. We find that market makers protect themselves by adjusting the bid and offer prices depending on this probability. Additionally, we document very different behaviour across buy and sell sides in relation to mid prices. The last chapter shows how future monetary policy uncertainty, measured as the 30 day Fed funds futures signal to microstructure noise ratio, variation throughout a FOMC cycle (time period between two consecutive and scheduled meetings) leads to changes in returns and liquidity of the US corporate bond market. It shows that the FOMC communication generates two distinct corporate bond return regimes. I advocate that the cycle pattern, large and statistically significant excess bond returns only in even weeks, can be partially explained by a substantial difference in transaction costs between the two periods. My study demonstrates that the excess returns patterns coincide with liquidity regimes. I document that they are related to uncertainty about future monetary policy and describe a mechanism which can explain the empirical facts.
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