As part of managing a debt portfolio, debt managers face the challenging task of choosing a strategy that minimizes the cost of debt, subject to limitations on risk. The Bank of Canada provides debt-management analysis and advice to the Government of Canada to assist in this task, with the Canadian debt-strategy model being developed to help in this regard.
: Debt Management; Econometric and statistical methods; Financial markets; Fiscal PolicyModel risk is a constant danger for financial economists using interest-rate forecasts for the purposes of monetary policy analysis, portfolio allocations, or risk-management decisions. Use of multiple models does not necessarily solve the problem as it greatly increases the work required and still leaves the question "which model forecast should one use?"
: Econometric and statistical methods; Interest ratesIn its role as fiscal agent to the government, the Bank of Canada provides analysis and advice on decisions about the government's domestic debt portfolio. Debt-management decisions depend on assumptions about future interest rates, macroeconomic outcomes, and fiscal policy, yet when a debt-strategy decision is taken, none of these factors can be known with certainty. Moreover, the government has various financing options (i.e., treasury bills, nominal bonds, and inflation-linked bonds) to meet its objectives of minimizing debt-service charges while simultaneously ensuring a prudent risk profile and well-functioning government securities markets. Bank of Canada staff have therefore developed a mathematical model to assist in the decision-making process. This article describes the key aspects of the debt manager's challenge and the principal assumptions incorporated in the debt-strategy model, illustrated with specific results.
: Debt Management; Economic models; Fiscal PolicyThe primary objective of this paper is to compare a variety of joint models of the term structure of interest rates and the macroeconomy.
: Econometric and statistical methods; Financial markets; Interest ratesThe stochastic simulation model suggested by Bolder (2003) for the analysis of the federal government's debt-management strategy provides a wide variety of useful information. It does not, however, assist in determining an optimal debt-management strategy for the government in its current form.
: Debt Management; Econometric and statistical methods; Financial markets; Fiscal PolicyModelling term-structure dynamics is an important component in measuring and managing the exposure of portfolios to adverse movements in interest rates.
: Econometric and statistical methods; Financial markets; Interest ratesZero-coupon interest rates are the fundamental building block of fixed-income mathematics, and as such have an extensive number of applications in both finance and economics.
: Econometric and statistical methods; Financial markets; Interest ratesDebt strategy is defined as the manner in which a government finances an excess of government expenditures over revenues and any maturing debt issued in previous periods. The author gives a thorough qualitative description of the complexities of debt strategy analysis and then demonstrates that it is, in fact, a problem in stochastic optimal control.
: Debt Management; Econometric and statistical methods; Economic modelsThis paper continues the work started by Bolder and Stréliski (1999) and considers two alternative classes of models for extracting zero-coupon and forward rates from a set of observed Government of Canada bond and treasury-bill prices.
: Econometric and statistical methods; Financial markets; Interest ratesAn effective technique governments use to evaluate the desirability of different financing strategies involves stochastic simulation. This approach requires the postulation of the future dynamics of key macroeconomic variables and the use of those variables in the construction of a debt charge distribution for each individual financing strategy.
: Debt Management; Econometric and statistical methods; Interest ratesAffine models describe the stylized time-series properties of the term structure of interest rates in a reasonable manner, they generalize relatively easily to higher dimensions, and a vast academic literature exists relating to their implementation. This combination of characteristics makes the affine class a natural introductory point for modelling interest rate dynamics.
: Debt Management; Econometric and statistical methods; Interest ratesThe primary objective of this paper is to produce a framework that could be used to construct a historical data base of zero-coupon and forward yield curves estimated from Government of Canada securities' prices.
: Economic modelsThe Department of Finance and the Bank of Canada, as its fiscal agent, work closely with financial market participants in the management of the federal government's debt program. From the government's perspective, maintaining a liquid well-functioning market in Government of Canada securities is a key factor in ensuring that debt-service costs are minimized. It is [...]
: Debt Management
