Posted: September 13th, 2017

FINANCIAL MARKETS AND MONETARY POLICY

Paper, Order, or Assignment Requirements

FINANCIAL MARKETS AND MONETARY POLICY

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Coursework 2014/15

Submission deadline: 8 December 2014

During the recent financial crisis, the interest rates and the yield curves have been frequently

changing. The Bank of England offers access to the most recent yield curves as well as to the

archived data on interest rates in the past, see http://www.bankofengland.co.uk, and in particular

http://www.bankofengland.co.uk/statistics/pages/yieldcurve/default.aspx.

By using the relevant data, theoretical concepts and models, answer the following questions:

1) What is the term structure of interest rates? Plot the yield curves in the UK (using chart type

“surface” in Excel) for the end of each month for the period from 01.01.2008 to 30.09.2014.

Describe the financial instruments that you used for your yield curves. How is the interest

rate on those financial instruments calculated?

(40% of the total mark)

2) Describe the evolution of the yield curve in the UK over time. Based on the theories of the

term structure, explain the shapes and changes you observe.

(40% of the total mark)

3) Calculate the correlations between the shortest maturity and all longer maturities, e.g.

correl(m1,m2) correl(m1,m3), correl(m1,m4), etc. where m1 denotes the shortest maturity.

Plot the resulting series of correlations. Is the evolution in the correlations across the

maturities in line with your expectations? Explain why.

(20% of the total mark)

Total word count: not more than 2000.

Recommended reading

You may find the following publications useful for your understanding of the most recent

developments in the theories of the term structure of interest rates.

Greenwood, R., D. Vayanos (2010) “Price Pressure in the Government Bond Market,” The

American Economic Review, 100,Papers and Proceedings, pp. 585-590

Gürkaynak, R., J. Wright (2012) “Macroeconomics and the Term Structure,” Journal of

Economic Literature, 50, pp. 331-367