Economics
Interest Rate Volatility
Interest rate volatility refers to the degree of fluctuation in interest rates over a specific period. It reflects the uncertainty and risk associated with changes in interest rates, impacting borrowing costs, investment decisions, and overall economic stability. High interest rate volatility can lead to market instability and challenges for businesses and consumers in managing their finances.
Written by Perlego with AI-assistance
Related key terms
1 of 5
4 Key excerpts on "Interest Rate Volatility"
- Zamir Iqbal, Tarik Akin, Nabil El Maghrebi, Abbas Mirakhor, Zamir Iqbal, Tarik Akin, Nabil El Maghrebi, Abbas Mirakhor, Zamir Iqbal, Tarik Akin, Nabil Maghrebi, Abbas Mirakhor(Authors)
- 2020(Publication Date)
- De Gruyter Oldenbourg(Publisher)
The scope and effectiveness of monetary oper-ations may naturally differ from the conditions underlying he conventional system, but the objectives of price stability and monetary base are not dissimilar. The challenges tasks of design and implementation of policy measures are even more complex for central banks presented with dual financial systems. Part of the problem with the conduct of monetary policies based on interest rates has to do with a failure to recognize the importance of the natural rate of return in the real economy. Part of the problems associated with the limited room for maneuver in mone-tary policy stems from the anchoring of the entire financial system on pre-determined rates of return, interest rates that are independent of the states of na-ture of the real economy. In the absence of risk sharing and equity financing, the system is inherently biased toward the accumulation of debt, and the formation of asset bubbles leads inevitably to the perpetuation of financial crises. With the advent of quantitative and qualitative easing, there are also legitimate concerns about the controversial role of central banks in financial markets and their grow-ing balance sheets. It is important to address the above issues from both the theo-retical and empirical perspectives. But from the perspective of Islamic finance and economics where interest rates are not permitted, independent of their sign and magnitude, there is compelling evidence that policy uncertainty affects the formation of volatility expectations. This analytical evidence suggests that no amount of forward guidance can eliminate the excessive amount of policy uncer-tainty leading to unwarranted price fluctuations in financial assets, and shifting risk premia in the real economy. Chapter 5: Interest Rates, Monetary Policy and Market Volatility 135 References Äijö, Janne. 2008. “ Implied volatility term structure linkages between VDAX, VSMI and VSTOXX volatility indices.
eBook - PDF- Vito Bobek(Author)
- 2018(Publication Date)
- IntechOpen(Publisher)
The relatively lower impact of exchange rate volatility may arise from the zero bound problem, thus it is emphasized that the examination of impacts on exchange rate volatility on macro-economics variables should be made both considering conventional and unconventional monetary policy. Although impulse response functions (IRFs) did not detect the significant impact of exchange rate volatility on inflation, VDCs obtained supporting results to exchange rate pass-through (ERPT). I suggest that the monetary policy to be developed should clarify alternative channels that exchange rate may affect inflation. Keywords: panel vector autoregression, exchange rate volatility, uncovered interest rate parity, exchange rate pass-through, OECD countries 1. Introduction Introducing financial variables other than exchange rates particularly into the Taylor rule to explore the linkages among economic activity and the financial sector has become familiar © 2018 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. practice in the monetary policy setting [1 – 3]. Herein, dynamics in stock markets have also been described as an important indicator of the functioning of the economy since a large amount has been invested in stock markets in the prevalent financial integration process. However, cur-rency markets are a promising investment area leading to a great expansion in other financial markets by offering potential high returns on investments and opportunities for expanded diverse portfolios. Additionally, currency markets can be the center of economic analyses since variations in major currencies can be the source of fluctuations in financial markets and have consequences in economic activity that monetary policy authorities should consider.
eBook - PDFFinancial Institutions
Markets and Money
- David S. Kidwell, David W. Blackwell, David A. Whidbee, Richard W. Sias(Authors)
- 2020(Publication Date)
- Wiley(Publisher)
144 CHAPTER 5 Bond Prices and Interest Rate Risk for both the zero and the 10 percent coupon bonds the slopes of the lines are greater at lower interest rates and the lines flatten out at higher interest rates. Thus, price volatility is greater at lower interest rates and is less at higher starting interest rates. In short, Interest Rate Volatility is inversely related to the level of the starting interest rate. This result occurs because at higher interest rates the present value of more distant cash flows is reduced, and a greater percentage of the value of the bond is received from near term cash flows. As a result, the bond effectively has a shorter maturity in present value terms at higher interest rates and returns a greater percentage of the investment more quickly. Recall that any time you get a higher percentage of your money back sooner the investment will be less price volatile. SUMMARY OF IMPORTANT BOND PRICING RELATIONSHIPS You should remember three relationships between bond prices and yields: 1. Bond prices are inversely related to bond yields. 2. The price volatility of a long‐term bond is greater than that of a short‐term bond, hold- ing the coupon rate constant. Although price volatility increases with maturity, it does so at a decreasing rate. 3. The price volatility of a low‐coupon bond is greater than that of a high‐coupon bond, holding maturity constant. 4. Price volatility is inversely related to the starting market interest rate. We call on these relationships to help us explain interest rate risk in the next section, and later in the book, they also help us explain how interest rate risk affects financial institutions. 5.5 INTEREST RATE RISK AND DURATION By now, you should be catching on that investing in bonds can be risky. Market yields on bonds fluctuate on a daily basis, and these fluctuations cause bond prices to change through the mechanics of the bond‐pricing formula (Equation 5.3).
- Sebastian Edwards, Jeffrey A. Frankel, Sebastian Edwards, Jeffrey A. Frankel(Authors)
- 2009(Publication Date)
- University of Chicago Press(Publisher)
Interest Rate Volatility is above and below the sample median (in fig. 3.5), and those in which the average annual volatility of U.S. personal consumption expenditure is above and below the median (in figure 3.6). As before, we report the volume of real capital flows by coun-try grouping and type across the sample split. As is evident from figure 3.4, the volatility of G3 exchange rates has little discernible e ff ect on net real private capital flows to emerging-market economies or on any of the major regions reported. Beneath that total, though, there are important composi-tional e ff ects, in that both portfolio and other net capital flows step lower when G3 exchange rate volatility is higher. The unchanged total is due to the fact that private direct investment moves in the opposite direction: From 1970 to 1999, FDI tended to be higher in those years when G3 exchange rate volatility was on the high side of the median. Similar o ff setting movements of FDI and portfolio and other capital flows are evident when the sample is split according to the volatility of the U.S. short-term real interest rates, as in figure 3.5. In this case, on net, real private capital flows are somewhat higher when U.S. rates move more from month to This follows because the expansion of portfolio and other flows when interest rates are volatile more than makes up for a contraction in FDI. Apparently, the short-term financial transactions in portfolio and other flows are energized by Interest Rate Volatility, even as the longer-term transactions in FDI flag. The total and major components of private capital flows respond more similarly when the sample is split according to the volatility of U.S. con-sumption spending, as seen in figure 3.6. Relatively stable personal con-sumption expenditure (PCE) growth in the United States is associated with 156 Carmen M. Reinhart and Vincent Raymond Reinhart Table 3.9 Volatility and Foreign Real GDP Growth: Annual Rate (%), 1970–99 Degree of U.S.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
