Antonio Diez de los Rios is a Principal Researcher in the Financial Markets Department at the Bank of Canada. His primary interests include the pricing of fixed-income securities and asset pricing models of exchange rate determination. In particular, he is interested in the use of yield curve models to extract financial market participants’ expectations about the future path of monetary policy. Antonio Diez de los Rios received his PhD in Economics from CEMFI (Madrid, Spain) and was a post-doctoral fellow at the Universite de Montreal.
Using the prices of crude oil futures contracts, we construct the term structure of crude oil convenience yields out to one-year maturity. The crude oil convenience yield can be interpreted as the interest rate, denominated in barrels of oil, for borrowing a single barrel of oil, and it measures the value of storing crude oil over the borrowing period.
An important channel in the transmission of monetary policy is the relationship between the short-term policy rate and long-term interest rates. Using a new term-structure model, the authors show that the variation in long-term interest rates over time consists of two components: one representing investor expectations of future policy rates, and another reflecting a term-structure risk premium that compensates investors for holding a risky asset. The time variation in the term-structure risk premium is countercyclical and largely determined by global macroeconomic conditions. As a result, long-term rates are pushed up during recessions and down during times of expansion. This is an important phenomenon that central banks need to take into account when using short-term rates as a policy tool.
We construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate.