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This exploratory empirical study adopts an open-economy loanable funds model to investigate the impact of post-Bretton Woods U.S. federal government budget deficits on the ex ante real interest rate yield on ten-year Treasury notes. Autoregressive, two stage least squares (AR/2SLS) estimation for the 1972–2016 study period reveals that the ex ante real interest rate yield on these notes has been an increasing function of the federal budget deficit (expressed as a percent of GDP). It follows that elevating the federal budget deficit appears to elevate the real cost of borrowing in the U.S. Given the implications of higher longer-term ex ante real interest rates on investment in new plant and equipment and other economic variables, this finding is one that responsible policy-makers should not overlook.

We investigate the impact of federal government budget deficits and federal personal income tax rates on the ex post real interest rate yield on ten-year US Treasury notes. Using autoregressive two-stage least squares estimations for the post-Bretton Woods era, we find that the yield on these Treasury issues has been an increasing function of the federal budget deficit as a percent of GDP, both in the form of the total/unified deficit and the primary deficit, and also an increasing function of the average effective federal personal income tax rate. The estimation reveals that growth in the M2 money supply (relative to GDP) acts to reduce the real interest rate yield on ten-year Treasuries. Consequently, while a growing money supply can help to keep real interest rates on Treasury notes (and hence federal debt service costs) down, policymakers should be sensitive to the fact that both budget deficit increases and tax rate increases can elevate the real interest rate. JEL codes: E43, E62, H62

The effects of asset liquidity on expected returns for assets with infinite maturities (stocks) are examined for bonds (Treasury notes and bills with matched maturities of less than 6 months). The yield to maturity is higher on notes, which have lower liquidity. The yield differential between notes and bills is a decreasing and convex function of the time to maturity. The results provide a robust confirmation of the liquidity effect in asset pricing.

We show that Treasury security prices in the secondary market decrease significantly in the few days before Treasury auctions and recover shortly thereafter, even though the time and amount of each auction are announced in advance. These results are linked to dealers' limited risk-bearing capacity and end-investors' imperfect capital mobility, highlighting the important role of frictions even in very liquid financial markets. Our results imply a hidden issuance cost to the U.S. Department of the Treasury, estimated to be 9 to 18 bps of the auction size, or over half a billion dollars for the issuance size in 2007.

The yield on the 10-year U.S. Treasury Note is among the most cited interest rates by investors, policymakers, and financial institutions. We show that the 10-year Treasury yield’s forward-looking volatility, a VIX-style measure that is a proxy for uncertainty about future interest rates, is a useful state variable capable of predicting the returns and volatility of crude oil prices over the near term. Using monthly data from 2003 to 2020, we document that higher implied volatility in the 10-year U.S. Treasury derivatives market predicts declining oil prices and higher forward-looking volatility in those prices. Our results are robust to different subsamples and various empirical designs.

It is widely understood that an inversion of the yield curve of a government's debt securities is a precursor to a domestic recession. The inversion-recession link has been reinforced by the popular press as a forgone conclusion to such an extent that the public does not question the nuances involved with an inversion of yields. Additionally, many academic and practitioner studies use a variety of different measures of inversion. This paper is an attempt to focus attention on the meaning of yield curve inversion as well as the frequency with which it occurs within U.S. Treasury securities. Specifically, it is shown that different maturity yields invert more frequently than is perhaps realized. Further, these maturity inversions are apparently not notable events given the silence of the press when they occur. One is left to question which definition of an inverted yield curve is most relevant given the context in which it will be used.

Since the early 1980s, there have been a number of principally empirical studies of the impact of government budget deficits on interest rates that have typically tested the hypothesis that larger deficits raise interest rates. However, in more recent years, this topic has received far less attention. Accordingly, this study seeks to “update” the findings of such studies and to do so for the dominant North American economies of Canada and the U.S. Furthermore, in the pursuit of further insights into interest rates, the present study also investigates an effectively heretofore overlooked variable that arguably also might influence interest rates, namely, economic freedom. Finally, given the increased upward trend of government debt (relative to GDP) in recent years in Canada and the U.S., this study investigates the interest rate impact of rising national debt-to-GDP ratios. For the 1995–2024 period (and also in one estimate for the 1985–2001 period), this exploratory study finds compelling evidence (1) that the real interest rate yield on 10-year Treasuries in Canada and the real interest rate yield on 10-year U.S. Treasury notes are increasing functions of the central government budget deficits in both Canada and the U.S., respectively, and (2) the real interest rate yields on 10-year Treasuries in Canada and 10-year U.S. Treasury notes are both decreasing functions of economic freedom in Canada and the U.S., respectively. On the other hand, regarding the impact of a higher national debt-to-GDP ratio on the real ten-year Treasury yield, there is only very mixed support for an impact, with support for its impact coming from the Canadian estimates but no support whatsoever coming from the U.S. estimates.

Recently, the Journal of Risk and Financial Management completed a Special Issue that included papers based on invitations from the Editorial Board Members on a variety of areas in applied financial economics and risk management [...]

This article analyzed the cost of capital under risk conditions for thermoelectric plants in Brazil, applying the Capital Asset Pricing Model—CAPM and the Weighted Average Capital Cost—WACC. To estimate the local CAPM, we used information from the Electric Energy Index—IEE of publicly traded companies in the electricity sector in Brazil and for the global CAPM, we observed the companies associated with the Edison Electric Institute—EEI, listed on the New York Stock Exchange—NYSE and at the National Association of Securities Dealers Automated Quotations—NASDAQ—USA. The risk conditions for capital costs were represented by Monte Carlo simulation using, as a basis, the WACC of a fuel oil thermoelectric plant and the local and global CAPM. The main results show that the IEE and EEI companies obtained a positive average daily return. Due to the Brazil risk, under deterministic conditions, the local WACC (11.13% p.a.) was more attractive to investors when compared to the global WACC (10.32% p.a.) and the regulatory WACC of 10.55% p.a., established by the National Electric Energy Agency—ANEEL. The most risk-sensitive input variables were: unleveraged beta, net debt and equity. Under risk conditions observed by the market from the point of view of Brazilian companies, the chances of the WACC of the fuel oil thermoelectric plant being 11.1% p.a. was 68.30% and from a global perspective, the chance of WACC being 10.32% p.a. was 99.51%. It is concluded that the cost of capital under risk conditions provides a more realistic view of decision-making for privately held companies.

Purpose This paper aims to investigate the connectedness of Islamic Stock Markets in five regional financial systems, namely, the United States, the United Kingdom, Europe (EU), GCC (Gulf Cooperation Council) and APAC (Asia-Pacific Countries), and across different asset classes (i.e. bonds, gold and crude oil). Design/methodology/approach This methodology is inspired by Diebold and Yilmaz (2012) and Barunlik and Krehlik (2017) for performing dynamic variance decomposition network and for studying time–frequency dynamics of connectedness at different frequencies. Findings Results show that the nature of connectedness over the past decade is time–frequency dynamics. The decomposition of the total volatility spillovers is mostly dominated by the long-run component. Furthermore, dominant regions are the largest contributors of spillover index, with the lowest contribution in the system coming from the GCC market. Results also reveal a slightly higher volatility spillover index of Islamic than conventional equity indexes. Finally, the system that encompasses commodities and Islamic finance instruments, generates the much lower volatility spillover. Originality/value The findings have significant implications for portfolio managers who are interested in being able to predict asset returns, as well as for policymakers who are concerned with market stability.