Working Papers

Across the borders, above the bounds: a non-linear framework for international yield curves (with Iryna Kaminska and Sergio Pastorello)  Bank of England - Staff Working Paper No. 1,062

This paper presents a non-linear framework to evaluate spillovers across domestic and international yield curves when policy rates are constrained by the zero lower bound. Based on the sample of US and UK data, we estimate a joint shadow rate model of international yield curves, accounting for the zero lower bound, no-arbitrage conditions within and between government bond markets, and the global nature of some of the bond risk factors. Results indicate that the post-2009 US monetary policy transmission mechanism and its spillover effects on the UK yield curve are non-linear and asymmetric. 

Information in (and not in) interest rate surveys (with Adam Golinski)

We show that standard term structure models for observed interest rates fail to capture interest rate survey expectations. We therefore propose a joint term structure model for observed interest rates and interest rate surveys that allows for separate objective and subjective probability measures. Our results contradict the previous term structure literature and provide evidence that interest rate surveys do not help identify observed interest rate dynamics. Yet, despite this evidence against the rational expectation hypothesis, we find that surveys provide valuable information as a priced risk factor that is not spanned by observed interest rates. [slides]

Testing for equal predictive accuracy with strong dependence (with Fabrizio Iacone), York Discussion Paper 21/03

Abstract: We analyse the properties of the Diebold and Mariano (1995) test in the presence of autocorrelation in the loss differential. We show that the power of the Diebold and Mariano (1995) test decreases as the dependence increases, making it more difficult to obtain statistically significant evidence of superior predictive ability against less accurate benchmarks. We also find that, after a certain threshold, the test has no power and the correct null hypothesis is spuriously rejected. Taken together, these results caution to seriously consider the dependence properties of the loss differential before the application of the Diebold and Mariano (1995) test.

Permanent working papers

Predicting the COVID-19 epidemic: is a regional approach preferable? (with Fabrizio Iacone, Giancarlo Manzi and Silvia Salini)

Abstract: We use a SIRD model to predict the dynamics of the COVID-19 epidemic in the Italian regions at 1 to 4 weeks ahead. Out of sample forecasting results indicate that national forecasts obtained by aggregating regional forecasts are more accurate than predictions from a national model. These results suggest that national health authorities should take into account the level of heterogeneity across regions when predicting the spread of a national epidemic.

TIPS Liquidity Premium and Quantitative Easing

Abstract: We assess the effect of the QE2 program on the TIPS liquidity premium using a latent factor approach and a counterfactual exercise. In the context of a state-space model for nominal and TIPS yields, we identify the TIPS liquidity premium as the common component in TIPS yields that is unspanned by nominal yields. We then construct a counterfactual TIPS liquidity premium that exploits suitable conditioning information. Results indicate that the QE2 program had only limited effect on the TIPS liquidity premium.