Bruno Feunou is a Research Advisor at the Bank of Canada’s Financial Markets Department. Before this position at the Bank of Canada, he worked at Duke University as a post-doc associate. He completed his Ph.D-Degree at the University of Montreal. During his thesis, he was supported by several Grants including IFM2, Banque Laurentienne, CIREQ and CREST. He also studied Mathematics and Statistics at several universities in Africa including the University of Dschang, Yaoundé I, ISSEA of Yaoundé and ENSEA of Abidjan. In these studies, he was supported by a grant from the European Union to study Statistics and Econometrics.
Staff analytical notes
Canadian interest rates show a secular decline since the 1980s. Long-term survey-based forecasts of interest rates also declined, but less so and were more gradual. Our model-based estimates show an endpoint shifting over time in three phases: a decline between 1990 and 1995, a period of stability between 1996 and 2007, and a further decline since 2008. The current endpoint estimate remains clouded with uncertainty; this is an active area of research.
We show that a large share of low-frequency (quarterly) movements in Canadian government bond yields can be explained by macroeconomic news, even though high-frequency (daily) changes are driven by other shocks. Furthermore, we show that US macro news—not domestic news— explains most of the quarterly variation in Canadian bond yields.
Many reports and analyses interpret the release of new economic data based on the headline surprise—for instance, total inflation, real GDP growth and the unemployment rate. However, we find that headline news alone cannot adequately explain the responses of market prices to new information. Rather, market prices react more strongly, on average, to non-headline news such as the composition of GDP growth, quality of jobs created and revisions to past data. Thus, tracking the impact of non-headline information released on the news day is crucial in analyzing how markets interpret and react to new economic data.
In this note, we find that market participants react to an unexpected change in the tone of Canadian monetary policy statements. When the market perceives that the Bank of Canada plans to tighten (or alternatively, loosen) the monetary policy earlier than previously expected, the Canadian dollar appreciates (or depreciates) and long-term Government of Canada bond yields increase (or decrease). The tone of a statement is particularly relevant to the market when the policy rate has been unchanged for some time.
Foreign investment flows into Government of Canada (GoC) bonds have surged since the financial crisis. Our empirical analysis suggests that foreign flows of $150 billion lowered the 10-year GoC bond yield by 100 basis points between 2009 and 2012.
Staff working papers
We investigate the economic forces behind the secular decline in bond yields. Before the anchoring of inflation in the mid-1990s, nominal shocks drove inflation, output and bond yields. Afterward, the impacts of nominal shocks were much less significant
We investigate the uncertainty around stock returns at different investment horizons. Since a return is either a loss or a gain, we categorize return uncertainty into two components—loss uncertainty and gain uncertainty. We then use these components to evaluate investment.
Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data.
We decompose total variance into its bad and good components and measure the premia associated with their fluctuations using stock and option data from a large cross-section of firms.
This paper provides a novel methodology for estimating option pricing models based on risk-neutral moments. We synthesize the distribution extracted from a panel of option prices and exploit linear relationships between risk-neutral cumulants and latent factors within the continuous time affine stochastic volatility framework.
Advances in variance analysis permit the splitting of the total quadratic variation of a
jump diffusion process into upside and downside components. Recent studies establish
that this decomposition enhances volatility predictions, and highlight the
upside/downside variance spread as a driver of the asymmetry in stock price
We estimate a continuous-time model with stochastic volatility and dynamic crash probability for the S&P 500 index and find that market illiquidity dominates other factors in explaining the stock market crash risk. While the crash probability is time-varying, its dynamic depends only weakly on return variance once we include market illiquidity as an economic variable in the model.
We greatly expand the space of tractable term-structure models. We consider one example that combines positive yields with rich volatility and correlation dynamics. Bond prices are expressed in closed form and estimation is straightforward.
Under very general conditions, the total quadratic variation of a jump-diffusion process can be decomposed into diffusive volatility and squared jump variation. We use this result to develop a new option valuation model in which the underlying asset price exhibits volatility and jump intensity dynamics.
We decompose the variance risk premium into upside and downside variance risk premia. These components reflect market compensation for changes in good and bad uncertainties. Their difference is a measure of the skewness risk premium (SRP), which captures asymmetric views on favorable versus undesirable risks.
Bank of Canada Review articles
May 13, 2014
Uncertainty surrounding the Bank of Canada’s future policy rates is measured using implied volatility computed from interest rate options and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following major policy actions taken by the Bank in response to the 2007–09 financial crisis. Findings also indicate that, on average, uncertainty decreases following the Bank’s policy rate announcements.
- "Secular Economic Changes and Bond Yields",
(with Jean-Sebastien Fontaine), The Review of Economics and Statistics, forthcoming.
- "Time-Varying Crash Risk Embedded in Index Options: The Role of Stock Market Liquidity",
(with Peter Christoffersen, Yoontae Jeon and Chayawat Ornthanalai), Review of Finance, forthcoming.
- "The Term Structure of Expected Quadratic Loss and Gain",
(with Ricardo Lopez Aliouchkin, Romeo Tedongap and Lai Xu), Journal of Financial Econometrics, vol. 18, issue 3, Summer 2020, pages 473-501.
- "Which Model to Forecast the Target Rate?",
(with Jean-Sebastien Fontaine and Jianjian Jin), Studies in Nonlinear Dynamics & Econometrics, forthcoming.
- "Risk-Neutral Moment-Based Estimation of Affine Option Pricing Models",
(with Cedric Okou), Journal of Applied Econometrics, vol. 33, issue 7, December 2018, pages 1007-1025.
- "Good Volatility, Bad Volatility and Option Pricing",
(with Cedric Okou), Journal of Financial and Quantitative Analysis, vol 54, no. 1, February 2019, pages 1-32.
- "Downside Variance Risk Premium",
(with Jahan-Parvar Mohammad and Cedric Okou), Journal of Financial Econometrics, vol. 16, issue 3, June 2018, pages 341-383.
- "Implied Volatility And Skewness Surface",
(with Romeo Tedongap and Jean-Sebastien Fontaine), Review of Derivatives Research, (July 2017) vol. 20, issue 2, pages 167-202.
- "Gaussian Term Structure Models and Bond Risk Premia",
(with Jean-Sebastien Fontaine), Management Science, vol. 64, issue 3, March 2018, pages 1413-1439.
- "Option Valuation with Observable Volatility and Jump Dynamics",
(with Peter Christoffersen and Yoontae Jeon), Journal of Banking and Finance, vol. 61, supplement 2, December 2015, pages S101-S120.
- "Fourier Inversion Formulas for Multiple Assets Option Pricing",
(with Ernest Tafolong), Studies in Nonlinear Dynamics & Econometrics, (2015) vol. 19, issue 5, pages 531-559.
- "Non-Markov Gaussian Term Structure Models: The Case of Inflation",
(with Jean-Sebastien Fontaine), Review of Finance, (August 2014) 18(5): 1953-2001.
- "Which parametric model for conditional skewness?",
(with Jahan-Parvar Mohammad and Romeo Tedongap), The European Journal of Finance, vol. 22, 2016 - issue 13, pages 1237-1271.
- "The Equity Premium And The Maturity Structure of Uncertainty",
(with Jean-Sebastien Fontaine, Abderahim Taamouti, and Romeo Tedongap), Review of Finance, (January 2014) 18(1): 219-269.
- "The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation",
(with Peter Christoffersen, Kris Jacobs and Nour Meddahi), Journal of Financial and Quantitative Analysis (June 2014), vol. 49, issue 03, pages 663-697.
- "A Stochastic Volatility Model with Conditional Skewness",
(with Romeo Tedongap), Journal of Business and Economic Statistics, vol. 30, no. 4 (October 2012), pages 576-591.
- "Modeling Market Downside Volatility",
(with Jahan-Parvar Mohammad and Romeo Tedongap), Review of Finance, (January 2013) 17(1): 443-481.
- "Option Valuation with Conditional Heteroskedasticity and Nonnormality",
(with Peter Christoffersen, Redouane Elkamhi, Kris Jacobs), Review of Financial Studies, vol. 23 (May, 2010), pages 2139-2183, ISSN 1465-7368.