Explanatory Elements of the Deformations of the Term Structure of Interest Rates

Assoumou Menye Oscar

doi:doi:10.11648/j.jfa.20210906.14

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Explanatory Elements of the Deformations of the Term Structure of Interest Rates

Assoumou Menye Oscar

Published in Journal of Finance and Accounting (Volume 9, Issue 6)

Received: 19 October 2021 Accepted: 8 November 2021 Published: 17 November 2021

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Abstract

The interest rate curve has often been defined as a graphical representation of the yield offered by bonds of a single issuer according to their maturity, from shortest to longest. The best-known yield curve, which serve as a benchmark for the entire bond market in a given country, is that of the government bonds. Indeed, the shape of the interest rate curve on sovereign bonds provides information on investor’s expectations on the risk of default of the issuing state as well as on the level of inflation and future interest rates. As a result, it is a good indicator of the economic and financial health of the issuing country. In a stable economic environment marked by low inflation and sustainable public debt, bond yields increase with the maturity of securities. This is explained by the fact that the longer the maturity, the greater the risk of events occurring that could adversely affect the value of the bond security. Indeed, the further in time one goes, the greater the uncertainty about the issuer’s repayment capacity or about the level of interest rates. Under these conditions, investors require a risk premium to lend on long maturities compares to short maturities. However, as government loans are generally considered to be loans for which repayment is certain, the associated risk premiums are low or almost zero. On the longest maturities (20 to 50 years), the default risk as well as the interest rate or inflation risks can be considered to be broadly identical. This is the reason why the yield curves on government bonds of most "so-called" developed countries have an increasing and concave shape. This article highlights the explanatory factors of the structure of forward interest rates by proposing a multifactorial model of asset valuation that is at the same time exhaustive, simple, intelligible and realistic. The underlying objective is to propose techniques hedging against the risk of interest rates more effective than traditional techniques, especially since we live in an extremely sensitive and changing environment because of the consequences of covid-19 on economies. The contribution is part of the research movement aimed at improving the multifactorial models of the yield curve and to overcome the shortcomings of the techniques traditionally used.

Published in	Journal of Finance and Accounting (Volume 9, Issue 6)
DOI	10.11648/j.jfa.20210906.14
Page(s)	236-248
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2021. Published by Science Publishing Group

Keywords

Yield Curve, Structure of Forward Rates, Principal Component Analysis (PCA), Multifactor Model, Risk Hedging, Duration

References

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[2]	AMF, Opérations sur titres: l’importance de l’information sur les modalités de réponses possibles, 02 février 2021.
[3]	ARTUS P., BELHOMME C., ELALOUF C. et MINCZELES A., 1992, “Les déformations de la structure des taux et la couverture du risque de taux d’intérêt”, Caisse des Dépôts et Consignations, Document de travail n°1992-01/F, mai.
[4]	Bierwag G., Fooladi I., «Duration analysis: An historical perspective», Journal of Applied Finance février 2006, vol. 16, n°2, pp. 144-160.
[5]	BRENNAN J. et SCHWARTZ E. S., 1982, “An Equilibrium Model of Bond Pricing and a Test of Market Efficiency”, Journal of Financial and Quantitative Analysis, 17, September, pp. 301-329.
[6]	Cobbaut R., Gillet R. et Hubener G., La gestion de portefeuille, De Boeck, Coll. «Comptabilité, contrôle et gestion», 2015.
[7]	EL KAROUI N. et LACOSTE V., 1992, “Multifactor Models of the Term Structure of Interest Rates”, Actes du Congrès de l’AFFI, Paris, Juillet.
[8]	Gresse C., Marché de taux d’intérêt, Economica, 2017.
[9]	HEATH D., JARROW R. et MORTON A., 1990, “Bond Pricing and the Term Structure of Interest rates a Discrete Time Approximation”, Journal of Financial and Quantitative Analysis, 25, n°4, December, pp. 419-440.
[10]	HO T. et LEE S., 1986, “Term Structure Movements and Pricing Interest Rate Contingent Claims”, Journal of Finance, December, 41, pp. 1011-1029.
[11]	Jacquillat B., Solnik B. et Pérignon C., Marchés financiers, Dunod, 2014.
[12]	JACQUILLAT B. ET LAGUICHE S., 1990, “Risque des obligations à taux variable: une étude empirique du marché français”, Conférence Les problèmes non-linéaires appliqués: modèles mathématiques en finance, CEA-EDF-INRIA, mars.
[13]	LITTERMAN R. et SCHEINKMAN J., 1988, “Common Factors Affecting Bond Returns”, Financial Strategies Group, Goidman Sachs, September.
[14]	Simon Y., Notation et agences de rating, Economica, 2017.
[15]	VASICEK O., 1977, “An Equilibrium Characterization of the Term Structure”, Journal of Financial Economics, 5, pp. 177-188.
[16]	VERNIMMEN P., Finance d’entreprise, Dalloz, 2021.

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APA Style

Assoumou Menye Oscar. (2021). Explanatory Elements of the Deformations of the Term Structure of Interest Rates. Journal of Finance and Accounting, 9(6), 236-248. https://doi.org/10.11648/j.jfa.20210906.14

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Assoumou Menye Oscar. Explanatory Elements of the Deformations of the Term Structure of Interest Rates. J. Finance Account. 2021, 9(6), 236-248. doi: 10.11648/j.jfa.20210906.14

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AMA Style

Assoumou Menye Oscar. Explanatory Elements of the Deformations of the Term Structure of Interest Rates. J Finance Account. 2021;9(6):236-248. doi: 10.11648/j.jfa.20210906.14

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@article{10.11648/j.jfa.20210906.14,
  author = {Assoumou Menye Oscar},
  title = {Explanatory Elements of the Deformations of the Term Structure of Interest Rates},
  journal = {Journal of Finance and Accounting},
  volume = {9},
  number = {6},
  pages = {236-248},
  doi = {10.11648/j.jfa.20210906.14},
  url = {https://doi.org/10.11648/j.jfa.20210906.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20210906.14},
  abstract = {The interest rate curve has often been defined as a graphical representation of the yield offered by bonds of a single issuer according to their maturity, from shortest to longest. The best-known yield curve, which serve as a benchmark for the entire bond market in a given country, is that of the government bonds. Indeed, the shape of the interest rate curve on sovereign bonds provides information on investor’s expectations on the risk of default of the issuing state as well as on the level of inflation and future interest rates. As a result, it is a good indicator of the economic and financial health of the issuing country. In a stable economic environment marked by low inflation and sustainable public debt, bond yields increase with the maturity of securities. This is explained by the fact that the longer the maturity, the greater the risk of events occurring that could adversely affect the value of the bond security. Indeed, the further in time one goes, the greater the uncertainty about the issuer’s repayment capacity or about the level of interest rates. Under these conditions, investors require a risk premium to lend on long maturities compares to short maturities. However, as government loans are generally considered to be loans for which repayment is certain, the associated risk premiums are low or almost zero. On the longest maturities (20 to 50 years), the default risk as well as the interest rate or inflation risks can be considered to be broadly identical. This is the reason why the yield curves on government bonds of most "so-called" developed countries have an increasing and concave shape. This article highlights the explanatory factors of the structure of forward interest rates by proposing a multifactorial model of asset valuation that is at the same time exhaustive, simple, intelligible and realistic. The underlying objective is to propose techniques hedging against the risk of interest rates more effective than traditional techniques, especially since we live in an extremely sensitive and changing environment because of the consequences of covid-19 on economies. The contribution is part of the research movement aimed at improving the multifactorial models of the yield curve and to overcome the shortcomings of the techniques traditionally used.},
 year = {2021}
}

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TY  - JOUR
T1  - Explanatory Elements of the Deformations of the Term Structure of Interest Rates
AU  - Assoumou Menye Oscar
Y1  - 2021/11/17
PY  - 2021
N1  - https://doi.org/10.11648/j.jfa.20210906.14
DO  - 10.11648/j.jfa.20210906.14
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 236
EP  - 248
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20210906.14
AB  - The interest rate curve has often been defined as a graphical representation of the yield offered by bonds of a single issuer according to their maturity, from shortest to longest. The best-known yield curve, which serve as a benchmark for the entire bond market in a given country, is that of the government bonds. Indeed, the shape of the interest rate curve on sovereign bonds provides information on investor’s expectations on the risk of default of the issuing state as well as on the level of inflation and future interest rates. As a result, it is a good indicator of the economic and financial health of the issuing country. In a stable economic environment marked by low inflation and sustainable public debt, bond yields increase with the maturity of securities. This is explained by the fact that the longer the maturity, the greater the risk of events occurring that could adversely affect the value of the bond security. Indeed, the further in time one goes, the greater the uncertainty about the issuer’s repayment capacity or about the level of interest rates. Under these conditions, investors require a risk premium to lend on long maturities compares to short maturities. However, as government loans are generally considered to be loans for which repayment is certain, the associated risk premiums are low or almost zero. On the longest maturities (20 to 50 years), the default risk as well as the interest rate or inflation risks can be considered to be broadly identical. This is the reason why the yield curves on government bonds of most "so-called" developed countries have an increasing and concave shape. This article highlights the explanatory factors of the structure of forward interest rates by proposing a multifactorial model of asset valuation that is at the same time exhaustive, simple, intelligible and realistic. The underlying objective is to propose techniques hedging against the risk of interest rates more effective than traditional techniques, especially since we live in an extremely sensitive and changing environment because of the consequences of covid-19 on economies. The contribution is part of the research movement aimed at improving the multifactorial models of the yield curve and to overcome the shortcomings of the techniques traditionally used.
VL  - 9
IS  - 6
ER  -

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Author Information

Assoumou Menye Oscar

Department "Finance and Accounting", ESSEC of the Douala University, Douala, Cameroon

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APA Style

Assoumou Menye Oscar. (2021). Explanatory Elements of the Deformations of the Term Structure of Interest Rates. Journal of Finance and Accounting, 9(6), 236-248. https://doi.org/10.11648/j.jfa.20210906.14

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ACS Style

Assoumou Menye Oscar. Explanatory Elements of the Deformations of the Term Structure of Interest Rates. J. Finance Account. 2021, 9(6), 236-248. doi: 10.11648/j.jfa.20210906.14

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AMA Style

Assoumou Menye Oscar. Explanatory Elements of the Deformations of the Term Structure of Interest Rates. J Finance Account. 2021;9(6):236-248. doi: 10.11648/j.jfa.20210906.14

Copy | Download

@article{10.11648/j.jfa.20210906.14,
  author = {Assoumou Menye Oscar},
  title = {Explanatory Elements of the Deformations of the Term Structure of Interest Rates},
  journal = {Journal of Finance and Accounting},
  volume = {9},
  number = {6},
  pages = {236-248},
  doi = {10.11648/j.jfa.20210906.14},
  url = {https://doi.org/10.11648/j.jfa.20210906.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20210906.14},
  abstract = {The interest rate curve has often been defined as a graphical representation of the yield offered by bonds of a single issuer according to their maturity, from shortest to longest. The best-known yield curve, which serve as a benchmark for the entire bond market in a given country, is that of the government bonds. Indeed, the shape of the interest rate curve on sovereign bonds provides information on investor’s expectations on the risk of default of the issuing state as well as on the level of inflation and future interest rates. As a result, it is a good indicator of the economic and financial health of the issuing country. In a stable economic environment marked by low inflation and sustainable public debt, bond yields increase with the maturity of securities. This is explained by the fact that the longer the maturity, the greater the risk of events occurring that could adversely affect the value of the bond security. Indeed, the further in time one goes, the greater the uncertainty about the issuer’s repayment capacity or about the level of interest rates. Under these conditions, investors require a risk premium to lend on long maturities compares to short maturities. However, as government loans are generally considered to be loans for which repayment is certain, the associated risk premiums are low or almost zero. On the longest maturities (20 to 50 years), the default risk as well as the interest rate or inflation risks can be considered to be broadly identical. This is the reason why the yield curves on government bonds of most "so-called" developed countries have an increasing and concave shape. This article highlights the explanatory factors of the structure of forward interest rates by proposing a multifactorial model of asset valuation that is at the same time exhaustive, simple, intelligible and realistic. The underlying objective is to propose techniques hedging against the risk of interest rates more effective than traditional techniques, especially since we live in an extremely sensitive and changing environment because of the consequences of covid-19 on economies. The contribution is part of the research movement aimed at improving the multifactorial models of the yield curve and to overcome the shortcomings of the techniques traditionally used.},
 year = {2021}
}

Copy | Download

TY  - JOUR
T1  - Explanatory Elements of the Deformations of the Term Structure of Interest Rates
AU  - Assoumou Menye Oscar
Y1  - 2021/11/17
PY  - 2021
N1  - https://doi.org/10.11648/j.jfa.20210906.14
DO  - 10.11648/j.jfa.20210906.14
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 236
EP  - 248
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20210906.14
AB  - The interest rate curve has often been defined as a graphical representation of the yield offered by bonds of a single issuer according to their maturity, from shortest to longest. The best-known yield curve, which serve as a benchmark for the entire bond market in a given country, is that of the government bonds. Indeed, the shape of the interest rate curve on sovereign bonds provides information on investor’s expectations on the risk of default of the issuing state as well as on the level of inflation and future interest rates. As a result, it is a good indicator of the economic and financial health of the issuing country. In a stable economic environment marked by low inflation and sustainable public debt, bond yields increase with the maturity of securities. This is explained by the fact that the longer the maturity, the greater the risk of events occurring that could adversely affect the value of the bond security. Indeed, the further in time one goes, the greater the uncertainty about the issuer’s repayment capacity or about the level of interest rates. Under these conditions, investors require a risk premium to lend on long maturities compares to short maturities. However, as government loans are generally considered to be loans for which repayment is certain, the associated risk premiums are low or almost zero. On the longest maturities (20 to 50 years), the default risk as well as the interest rate or inflation risks can be considered to be broadly identical. This is the reason why the yield curves on government bonds of most "so-called" developed countries have an increasing and concave shape. This article highlights the explanatory factors of the structure of forward interest rates by proposing a multifactorial model of asset valuation that is at the same time exhaustive, simple, intelligible and realistic. The underlying objective is to propose techniques hedging against the risk of interest rates more effective than traditional techniques, especially since we live in an extremely sensitive and changing environment because of the consequences of covid-19 on economies. The contribution is part of the research movement aimed at improving the multifactorial models of the yield curve and to overcome the shortcomings of the techniques traditionally used.
VL  - 9
IS  - 6
ER  -

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