A closed-form solution for zero-coupon bonds is obtained for a version of the discrete-time arbitrage-free Nelson-Siegel model. An estimation procedure relying on a Kalman filter is provided. The model is shown to produce adequate fit when applied to historical Canadian spot rate data and to improve distributional predictive performance over benchmarks. An adaptation of the mixed fund return model from Augustyniak et al. ((2021). ASTIN Bulletin: The Journal of the IAA, 51(1), 131–159.) is also provided to include the discrete-time arbitrage-free Nelson-Siegel model as one of its building blocks.

Agents can learn from financial markets to predict macroeconomic outcomes, and learning dynamics can feed back into both the macroeconomy and financial markets. This paper builds on the adaptive learning (AL) model of [Slobodyan, S. and R. Wouters (2012a) American Economic Journal: Macroeconomics 4, 65–101.] by introducing the term structure of interest rates. This extension enables term structure information to fully characterize agents’ expectations in real time. This feature addresses an imperfect information issue neglected in the related AL literature. The term structure of interest rates results in a strong channel of persistence driven by multi-period forecasting. Including the term structure in the AL model results in a model fit similar to that obtained in the rational expectation (RE) version of the model, but it greatly reduces the importance of other endogenous sources of aggregate persistence such as price and wage stickiness and the elasticity of the cost of adjusting capital. The model estimated also shows that term premium innovations are a major source of persistent fluctuations in nominal variables under AL. This stands in sharp contrast to the lack of transmission of term premium shocks to the macroeconomy under REs.

We construct yield curve models for the UK nominal, real and implied inflation spot rates considering the linkage between their term structures and some macroeconomic variables, in particular, realised inflation and real GDP growth. The paper extends the benchmark “yield-only” model proposed by Şahin et al. (2014) by exploring the bidirectional relations between the yield curve factors and the macroeconomic variables and proposes a “yield-macro” model. Although a simple autoregressive order one process fits the yield curve factors quite well the insertion of some macroeconomic variables such as realised inflation and real GDP growth improves the models significantly. We also model macroeconomic variables that take the term structures into account and compare the yield-macro model with Wilkie’s model both philosophically and empirically.

Increasingly, modern business and investment management techniques are founded on approaches to measurement of profit and risk developed by financial economists. This paper begins by analysing corporate pension provision from the perspective of such financial theory. The results of this analysis are then reconciled with the sometimes contradictory messages from traditional actuarial valuation approaches and the alternative market-based valuation paradigm is introduced. The paper then proposes a successful blueprint for this mark-to-market valuation discipline and considers whether and how it can be applied to pension schemes both in theory and in practice. It is asserted that adoption of this market based approach appears now to be essential in many of the most critical areas of actuarial advice in the field of defined benefit corporate pension provision and that the principles can in addition be used to establish more efficient and transparent methodologies in areas which have traditionally relied on subjective or arbitrary methods. We extend the hope that the insights gained from financial theory can be used to level the playing field between defined benefit and defined contribution arrangements from both corporate and member perspectives.

This paper discusses the use of parametric models for description of the term structure of interest rates and their uses. We extend earlier work of Cairns (1998), Chaplin (1998) and Feldman et al. (1998), by presenting new theoretical results and also by demonstrating that the same model can be applied to countries other than the United Kingdom. First, we prove that the process of fitting a yield curve to price data has a unique optimal solution in both zero-coupon-bond and low-coupon-bond markets. Furthermore, an alternative method of curve fitting to those proposed previously is shown to have a unique solution in all markets.

The restricted-exponential model has previously been applied to U.K. data (Cairns, 1998). Here, we consider its wider application in European bond markets. In particular, we analyse German market data and conclude that the same model applies equally well to both countries.

In this paper, a finite-state mean-reverting model for the short rate, based on the continuous-time Ehrenfest process, will be examined. Two explicit pricing formulae for zero-coupon bonds will be derived in the general and special symmetric cases. Its limiting relationship to the Vasicek model will be examined with some numerical results.

Variable rate savings accounts have two main features. The interest rate paid on the account is variable and deposits can be invested and withdrawn at any time. However, customer behaviour is not fully rational and withdrawals of balances are often performed with a delay. This paper focuses on measuring the interest rate risk of variable rate savings accounts on a value basis (duration) and analyzes the problem how to hedge these accounts. In order to model the embedded options and the customer behaviour we implement a partial adjustment specification. The interest rate policy of the bank is described in an error-correction model.

We test the expectations theory of the term structure of U.S. interest rates in nonlinear systems. These models allow the response of the change in short rates to past values of the spread to depend upon the level of the spread. The nonlinear system is tested against a linear system, and the results of testing the expectations theory in both models are contrasted. We find that the results of tests of the implications of the expectations theory depend on the size and sign of the spread. The long maturity spread predicts future changes of the short rate only when it is high.