Yield Curve Shape
Discussion
I know a few people on here work in the city, so, a question. Is there any way you can explain Jensen's inequality in some form of English? So far, I get that effectively the relationship between bond yields and prices is non-linear, but I can't make the link between that and the shape of the curve. It seems to be something to do with the long-end of the curve being flatter.
However, why this is the case is beyond me.
However, why this is the case is beyond me.
Ok, almost got the answer to that question sorted now. However, can someone verify my knowledge on this:
http://www.bankofengland.co.uk/statistics/yieldcur...
Looking at those curves, presumably the dip at the short-end suggests the market is expecting a drop in rates fairly soon? Then presumably worries of higher inflation are competing with the expected lower interest rates to produce a generally downward sloping trend. Finally, the increased uncertainty of possible recession could have curved the long-end downwards, since the more convex bonds at that end are more desirable? Or is it just that the fears of the recession have pushed the entire long-end down?
So, marks out of 10 for accuracy, and any areas that need improvement. I've got to write about this in an exam in a week, and as you can see, my knowledge is hazy to say the least. Also, it would be interesting to see what people who are actually involved with this stuff think - the theoretical models are all well and good, but usually make one assumption too many.
All help is greatly appreciated...
http://www.bankofengland.co.uk/statistics/yieldcur...
Looking at those curves, presumably the dip at the short-end suggests the market is expecting a drop in rates fairly soon? Then presumably worries of higher inflation are competing with the expected lower interest rates to produce a generally downward sloping trend. Finally, the increased uncertainty of possible recession could have curved the long-end downwards, since the more convex bonds at that end are more desirable? Or is it just that the fears of the recession have pushed the entire long-end down?
So, marks out of 10 for accuracy, and any areas that need improvement. I've got to write about this in an exam in a week, and as you can see, my knowledge is hazy to say the least. Also, it would be interesting to see what people who are actually involved with this stuff think - the theoretical models are all well and good, but usually make one assumption too many.
All help is greatly appreciated...
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