NEMO ARC PROJECT

NEMO ARC Project

Negative and ultra-low interest rates: behavioral and quantitative modelling

Acronym: NEMO

 

 

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Post-doctoral researchers:

Emir Efendic (IPSY) (until November 2019)

Dimitra Kyriakopoulo (CORE) (until December 2019)

Elizaveta Lukmanova (CORE) (until September 2021) 

Aysegul Kanay (IPSY)

 

PhD students:

Liana Nersisyan (LFIN)  (until October 2022)

Aleksandar Todorovic (LFIN) (until September 2021)

Pavel Tretiakov (LFIN) (until September 2020)

Linqi Wang (LFIN) (until September 2022)

Aiste Petkeviciute (LFIN) (until September 2023)

 

Associate researchers:

Julio Davila (until April 2020)

Rudy De Winne (LFIN)

 

The Project

Interest rates are a cornerstone of economics and finance. They are at the foundation of asset pricing and monetary policy, and more generally of all intertemporal choices made by market participants and institutions every day, with huge consequences for the economic activity and wellbeing of our societies. Until recently, it was assumed (mostly implicitly) that interest rates could only possibly be positive. Notwithstanding, in the wake of the 2008 global financial crisis, major central banks of developed countries have been brought to conduct rates policies that turned them negative. The consequences of such a paradigm shift are both potentially huge and not well understood yet. This research project aims at shedding light on these consequences, both from an academic and a policy viewpoint, following three intertwined research lines that bring together a multidisciplinary team of researchers working on Behavioral Finance, Macro Finance, and Quantitative Finance.

Figure 1: The path to negative interest rates

The research project turns around the changes —both for modelling and policy-making— brought in by the possibility of negative interest rates. More specifically, we investigate:

1. how economic agents change their behaviors when interest rates are negative, and what the consequences of these changes are.
2. what are the implications of negative interest rates for the current models in economics and finance, and what changes are needed consequently.

The project addresses these questions from the three different viewpoints of its behavioral finance, macro finance, and quantitative financial modelling dimensions. These are articulated in three research axes.

Figure 2: NEMO’s research fields and overlaps

 

THESIS:

• Aleksandar Todorovic

Essays on individual reactions to ultra-low and negative interest rates

Thesis advisor: Prof. Catherine D'Hondt 

• Linqi Wang

Essays on Financial Econometrics and Quantitative Finance

Thesis advisors: Prof. Christian Hafner & Prof. Frédéric Vrins

 

PUBLICATIONS BY RESEARCH AXIS

 

BEHAVIORAL FINANCE

The behavioral axis of the project addresses questions regarding the consequences of negative interest rates (NIR) at the individual and contextual levels, respectively. 

Publications: 

Efendic, Emir; Corneille, Olivier; D'Hondt, Catherine; De Winne, Rudy (2021). How risk-prone are people when facing a sure loss? Negative interest rates as a convenient conceptual framework. Psychonomic Bulletin & Review, Vol. 28, p. 1715-1725

Corneille, Olivier; D'Hondt, Catherine; De Winne, Rudy; Efendic, Emir; Todorovic, Aleksandar (2021). What leads people to tolerate negative interest rates on their savings. Journal of Behavioral and Experimental Economics, Vol. 93, p. 101714

D'Hondt, Catherine; De Winne, Rudy; Todorovic, Aleksandar (2024). Target return as efficient driver of risk-taking. Review of Behavioral Finance, Vol. 16(1), p. 130-166

 

MACRO FINANCE

The macro finance axis of the project focuses on two main (interrelated) areas: monetary policy and term structure of interest rates.

Publications:

F. Allard, L. Iania, K. Smedts (2020). Stock-bond return correlations: Moving away from “one-frequency-fits-all” by extending the DCC-MIDAS approach. International Review of Financial Analysis, Vol. 71, 101557

B. De Backer, H. Dewachter, L. Iania  (2021). Macrofinancial information on the post-COVID-19 economic recovery: Will it be V, U or L-shaped? Finance Research Letters, Vol. 43, 101978

L. Iania, M. Lyrio, R. Moura (2021). Bond Risk Premia in Emerging Markets: evidence from Brazil and Uruguay. Applied Economics, Vol. 53(58), p. 6721-6738

K.K. Lawuobahsumo, B. Algieri, L. Iania, A. Leccadito (2022). Exploring Dependence Relationships between Bitcoin and Commodity Returns: An Assessment Using the Gerber Cross-Correlation. Commodities, Vol. 1(1), p. 34-49

L. Iania, P. Tretiakov, R. Wouters (2023). The risk premium in New Keynesian DSGE models: the cost of inflation channel. Journal of Economic Dynamics and Control, Vol. 155, 104732

Bernardina Algieri, Leonardo Iania, Arturo Leccadito (2023). Looking ahead: Forecasting total energy carbon dioxide emissions. Cleaner Environmental Systems, Vol. 9, 100112

Leonardo Iania, Robbe Collage, Michiel Vereycken (2023). The Impact of Uncertainty in Macroeconomic Variables on Stock Returns in the USA. Journal of Risk and Financial Management, Vol. 16(3), 189

Bernardina Algieri, Leonardo Iania, Arturo Leccadito, Giulia Meloni (2024). Message in a bottle: Forecasting wine prices. Journal of Wine Economics, Vol. 19, p. 64-91

L. Iania, M. Lyrio, L. Nersisyan. Oil Price Shocks and Bond Risk Premia Evidence from a Panel of 15 Countries. Energy Economics, 2024 - (Accepté/Sous presse)

 

QUANTITATIVE FINANCE

The quantitative finance axis of the project is centered around:

1. the impact of negative interest rates (NIR) on risk attitudes and investment strategies and
2. the non-linearities introduced by NIR in asset pricing.

Publications:

Bocart, F., Ghysels, E. and Hafner, C.M. (2020). Monthly art market returns, Journal of Risk and Financial Management, Vol. 13(5), p. 100

Hafner, C.M. (2020). Testing for bubbles in cryptocurrencies with time-varying volatility, Journal of Financial Econometrics, Vol. 18(2), p. 233–249

Hafner, C.M., Linton, O. and Tang, H. (2020). Estimation of a Multiplicative Correlation Structure in the Large Dimensional Case, Journal of Econometrics, Vol. 217(2),  p. 431-470

Hafner, C.M. (2020). The spread of the COVID-19 pandemic in time and space, International Journal of Environmental Research and Public Health, Vol. 17(11), 3827

Lassance, Nathan; Vrins, Frédéric (2021). Portfolio selection with parsimonious higher comoments estimation. Journal of Banking & Finance, Vol. 126, 106115

Hafner, C.M., El Mehdi, R. (2021), Panel stochastic frontier analysis with dependent error terms, International Econometric Review, Vol. 13(2), p. 24-40

Lassance, N. and Vrins, F. (2021), Minimum Rényi entropy portfolios, Annals of Operations Research, Vol. 299, p. 23-46

Hafner, Christian; Herwartz, Helmut; Maxand, Simone (2022). Identification of structural multivariate GARCH models. Journal of Econometrics, Vol. 227(1), p. 212-227

Mbaye, Cheikh; Vrins, Frédéric (2022). Affine term structure models: a time-change approach with perfect fit to market curves. Mathematical Finance, Vol. 32(2), p. 678-724

Roccazzella, Francesco ; Gambetti, Paolo ; Vrins, Frédéric (2022). Optimal and robust combination of forecasts via constrained optimization and shrinkage. International Journal of Forecasting, Vol. 38(1), p. 97-116

Kyriakopoulou, D. and Hafner, C.M. (2022). Reconciling negative return skewness with positive time-varying risk premia, Econometric Reviews, Vol. 41(8), p. 877-894

Hafner, C.M. and Majeri, S. (2022), Analysis of cryptocurrency connectedness based on network to transaction volume ratios, Digital Finance, Vol. 4, p. 187-216

Paolo Gambetti, Francesco Roccazzella, Frédéric Vrins (2022). Meta-Learning Approaches for Recovery Rate Prediction. Risks, Vol. 10(6), 124

Mbaye, Cheikh ; Sagna, Abass ; Vrins, Frédéric (2022). A general firm-value model under partial information. Journal of Computational Finance, Vol. 26(1)

Barbagli, Matteo ; Vrins, Frédéric (2023). Accounting for PD-LGD dependency: A tractable extension to the Basel ASRF framework. Economic Modelling, Vol. 125, 106321

Bocart, F., Hafner, C.M., Y. Kasperskaya and M. Sagarra (2023), Investing in superheroes? Comic art as a new alternative investment, Journal of Alternative Investments, Vol. 25(3), p. 9-27

Hafner, C.M. and Herwartz, H. (2023), Asymmetric Volatility Impulse Response Functions, Economics Letters, Vol. 222, 110968

Hafner, C.M., Wang, L. (2023), A dynamic conditional score model for the log correlation matrix, Journal of Econometrics, Vol. 237 (2, part B), 105176

Hafner, C.M., Herwartz, H. (2023), Dynamic score driven independent component analysis, Journal of Business & Economic Statistics, Vol. 41(2), p. 298-308

Hafner, Christian M. ; Herwartz, Helmut (2023), Correlation impulse response functions, Finance Research Letters, Vol. 57, 104176

Lassance, Nathan ; Vrins, Frédéric (2023). Portfolio selection: A target-distribution approach. European Journal of Operational Research, Vol. 310(1), p. 302-314

El Mehdi, Rachida ; Hafner, Christian M. (2024). Panel Stochastic Frontier Analysis with Positive Skewness. Computational Economics, 2024 - (Accepté/Sous presse)

Hafner, Christian M. ; Linton, Oliver B. ; Wang, Linqi (2024), Dynamic Autoregressive Liquidity (DArLiQ), Journal of Business & Economic Statistics, Vol. 42(2), p. 774-785

Hafner, Christian M. ; Wang, Linqi (2024). Dynamic portfolio selection with sector-specific regularization. Econometrics and Statistics - (Accepté/Sous presse)

Hafner, Christian M. (2024), Explanatory factors of French retail wine prices. Applied Economics Letters - (Accepté/Sous presse)

Lassance, Nathan ; Vanderveken, Rodolphe ; Vrins, Frédéric (2024), On the Combination of Naive and Mean-Variance Portfolio Strategies, Journal of Business & Economic Statistics, Vol. 42(3), p. 875-889

Fülle, Markus J. ; Hafner, Christian M. ; Herwartz, Helmut ; Lange, Alexander (2024). BEKKs: An R Package for Estimation of Conditional Volatility of Multivariate Time Series. Journal of Statistical Software - (Accepté/Sous presse)

Vrins, Frédéric ; Wang, Linqi (2024). Asymmetric short-rate model without lower bound, Quantitative Finance, Vol. 23(2), p. 279-295

Hafner, C.M., Herwartz, H. and Wang, S. (2024), Statistical identification of independent shocks with kernel-based maximum likelihood estimation and an application to the global crude oil market. Journal of Business & Economic Statistics - Forthcoming

 

WORKING PAPERS

Efendic, E., D’Hondt, C., De Winne, R., and Corneille, O. "Negative interest rates may be more psychologically acceptable than assumed: Implications for savings". LFIN Working Paper 2019/6 - Submission to journal pending

Corneille, Olivier; D'Hondt, Catherine; De Winne, Rudy; Efendic, Emir; Todorovic, Aleksandar. "What leads people to tolerate negative interest rates on their savings?". LFIN Working Paper 2020/05

D'Hondt, Catherine; De Winne, Rudy; Todorovic, Aleksandar. "Target Returns and Negative Interest Rates". LIDAM Discussion Paper LFIN 2021/11

Todorovic, A. (2021). “Negative interest rates and status quo bias”

Todorovic, A. (2021). “Negative interest rates and money illusion”

Lukmanova, E. and Davila, J. (2021), “Negative Rates”

Lukmanova, E. and Goncharenko, R. (2021). “Aren't Labor Markets Important for Monetary Policy?”

Lukmanova, E. and Rabitsch, K. (2021). “New Evidence on Monetary Transmission: Interest Rate versus Inflation Target Shocks”

Lukmanova, E. and Rabitsch, K. (2021). “Re-assessing International Effects of US Monetary Policy Shocks”

Lukmanova, E. and Wouters, R. (2021) “Inflation Expectations and Term Premium”

L. Iania, B. Algieri, A. Leccadito. "Forecasting total energy’s CO2 emissions". LIDAM Discussion Paper LFIN 2022/03 - Under review

Jef Boeckx, Leonardo Iania, Joris Wauters. "Macroeconomic drivers of Inflation Expectations and Inflation Risk Premia". LIDAM Discussion Paper LFIN 2023/03

Walter Distaso, Francesco Roccazzella, Frédéric Vrins. "Business cycle and realized losses in the consumer credit industry". LIDAM Discussion Paper LFIN 2023/07 - Submission to journal pending

Matteo Barbagli, Pascal François, Geneviève Gauthier, Frédéric Vrins. "The role of CDS spreads in explaining bond recovery rates". LIDAM Discussion Paper LFIN 2024/02 - Submission to journal pending

Rodolphe Vanderveken, Nathan Lassance, Frédéric Vrins. "Optimal Portfolio Size under Parameter Uncertainty". LIDAM Discussion Paper LFIN 2024/04 - Submission to journal pending

 

SEMINARS & EVENTS

 

• Internal Workshop on TEAMS – November 18, 2020
  • “Risk or sure loss? Evidence of sure loss tolerance from three behavioral studies using NIR as a conceptual framework”
  • “Negative interest rate and derivative pricing”
  • “Bank intermediation and negative interest rates”
  • “Zero lower bound or target return - which reference point prevails with negative interest rates?” & “Drivers of risk premia in a structural model with an extension at ZLB”
• Internal Workshop on TEAMS – February 10, 2022
  •  “Dynamic portfolio selection with sector-specific regularization”
  • “Negative Interest Rates and Money Illusion”
• Seminar on "Natural rate chimera and bond price reality, by Wolfgang Lemke (ECB ) : https://www.nbb.be/en/events/natural-rate-chimera-and-bond-pricing-reality - May 05, 2022
• Society of Financial Econometrics (SoFiE) Financial Econometrics Summer School and workshop 2022 on "Methods for Empirical Asset Pricing with Large Data Sets" by Olivier Scaillet (University of Geneva and SFI) and Fabio Trojani (University of Geneva and SFI), see:https://calendar.time.ly/um7txyzq/stream;event=68728500;instance=20220620210000 - June 20-23, 2022
• Seminar on: "The Cyclicality of the Term Structure of Interest Rates", by Antonio Moreno (University of Navarra): https://www.nbb.be/en/events/cyclicality-term-structure-interest-rates - February 16, 2023
• Society of Financial Econometrics (SoFiE) Financial Econometrics Summer School and workshop 2023 on "Monetary Policy and the Yield Curve" by Glenn Rudebusch (Brooking Institute and NYU) and Michael Bauer (University of Hamburg), see: https://sites.google.com/view/sofieschoolbrussels/home - June 20-23, 2023