Download Correlations & Cyclical Properties of Interest Rates & Corporate Bond Spreads and more Exams Capital Markets Regulation in PDF only on Docsity! Stephanie Ordonez Fin 3316 Garcia Regis MiniCase 1 Mackenzee Sims February 13, 2009 Elizabeth Stylianou Michael Texidor 1) The Federal Funds Rate, 3 Month T-Bill Rate, 10 Year T-Bond, AAA, and BAA appear to increase and decrease together according to the Interest Rates graph. All five peaked in the 1980s. With low rates meaning the best times, and high rates meaning the worst times: The worst years for interest rates ranged from 1980 through 1982. The best years for interest rates ranged from 2001 to 2004 and 2008. Before that, 1955 was the best year. Fed Funds 3 Mth T-Bill 10 Yr T-Bond AAA BAA Mean 5.655254237 5.15938366 7 6.529583975 7.328597843 8.30238829 Standard Deviation 3.325148837 2.78139951 5 2.637150008 2.624348545 2.92595758 3 Minimum Value 0.15 (2009-01-01) 0.03 (2008-12-01) 2.42 (2008-12-01) 2.93 (1955-01- 01&1955-02- 01) 3.45 (1955-01-01) Maximum Value 19.1 (1981-06-01) 16.3 (1981- 05-01) 15.32 (1981-09-01) 15.49 (1981-01-01) 17.18 (1982-02-01) CORRELATION Time Series Fed Funds 3 Month T- Bill 10 Year T- Bond AAA 3 Month T-Bill 0.986397985 10 Year T-Bond 0.878254443 0.90329022 6 AAA 0.832709751 0.84933980 3 0.980059021 BAA 0.813442597 0.82655005 6 0.966685009 0.993272765 2) The strongest correlation exhibited is between the AAA rate and BAA rate with a correlation of 0.99327. The correlation between the Fed Funds rate and the BAA corporate bonds rate is the weakest one, with a correlation of 0.81344. The correlations located in the table are clearly represented in the graph as well. All of the series possess a high correlation (greater than 0.8) and we can observe this from the graph. All of the movements between the rates are similar, following the same approximate path through time. Also, the high correlation between the AAA rate and the BAA rate is easily seen in the graph. These series appear to move at almost the exact same time, rising and falling when the other one rises or falls. When we compare the BAA rate and Fed Funds rate, the weakest correlation, we find that their movements are also similar. This is because the correlation is still relatively high. However, the graph does show that they do not always move at the same time. Certain times, the Fed Funds rate has risen while the BAA rate has stayed relatively constant or even fallen a little bit. When looking at the contemporaneous correlations, it is clear that the correlation between the BAA rate and the Fed Funds rate is always the weakest one (with the exception of the 1990s, but by a small margin). This correlation between these two rates was weakest in the 1970s. The correlation between the AAA and BAA rates has been extremely high in all these decades, but it has not always been the strongest one. At times, the Fed Funds rate and the 3 Month T-Bill rate exhibit the strongest correlations. It can also be observed that in the 1960s, all these rates had a very high correlation among themselves (all the rates were above 0.8, with the weakest being 0.86262). In the following decades some rates have experienced lower correlations with others. For example, the correlation between the BAA rate and the Fed Funds rate was 0.86262 in the 1960s, but fell to 0.37577 in the 1970s. A similar thing happened with the correlation between other rates. Term Spread Default Spread CORRELATION Mean 1.370200308 0.973790447 Term Spread to Default Spread 0.282300911 Standard Deviation 1.199805845 0.440773513 Minimum Value 0.32 -2.65 Maximum Value 3.38 4.42
