Economic Effects of Low Interest Rates

Experiments by Global Central Banks

Abu HanifDepartment of Statistical Science

STATG099 MSc ProjectSeptember 2016

Supervisor: Mr. Dieter Girmes

To predict when interest rates on government bonds with different terms of maturity in various countries will go negative and forecast how low interest will potentially fall in a few years to come.

To study and analyse the consequences of interest rates going negative on government bonds and how this will affect pension fund firms, pensioners and insurance companies.

What is the aim of my project?

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What is interest, how it affects bonds and what are negative interest rates?

What is risk free return and risk premium How are pension fund firms affected and an insight into

the asset allocation of pension fund firms A view of EU, US and UK bonds across the past 12 years A look at correlation plots of various bonds How do bonds and risk premiums look like at the

moment View of 3 year prediction models on where bonds are

heading

Contents

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Interest is a payment made to a lender by a borrower on top of what they owe as a premium for the lender on taking risk

Fluctuations in interest affect bonds. A rise in interest will makes bonds more attractive for example

Negative interest is where depositors are charged in order to keep their money in a bank

What is interest, how it affects bonds and what are negative interest rates?

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Risk free return is the rate of return an investor can expect to gain without putting his investment at risk of losses

Risk premium is the extra amount the investor is rewarded with for taking a bigger risk in regards to their investment

Can be calculated using the Sharpe Ratio

What is risk free return and risk premium

Negative interests take a toll on pension fund firms

Government legislation plays a part in affecting pension funds in certain countries

The way pension fund firms have setup their portfolios also results in potential problems

How are pension fund firms affected and an insight into the asset allocation of

pension fund firms

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A view of EU, US and UK bonds across the past 12 years

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A view of EU, US and UK bonds across the past 12 years

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A view of EU, US and UK bonds across the past 12 years

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A look at correlation plots of various bonds

UK, US and EU correlation plot focusing on the change in 20 & 30 year bonds.

We can see outliers in all 3 plots

This could because of an event such as a statement by the FED for example

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How do bonds and risk premiums look like at the moment

We can see that the risk premium has been acting erratically and has become phenomenally high in the past few years

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How do bonds and risk premiums look like at the moment

View of 3 year prediction models on where bonds are heading

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View of 3 year prediction models on where bonds are heading

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View of 3 year prediction models on where bonds are heading

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Government bonds in the UK and EU will be negative according to my predictions within 3-5 years and US bonds are not following far behind.

The Pension Protection Fund will need to gear up for a potential huge reimbursement of lost pensions to pensioners as my predictions leads me to believe that insolvencies of many pension fund firms are to come due to these harsh condition in regards to the decreasing interest rates

Negative interest rates seem like a redistribution of wealth Investors will have differing opinions in where to park their

money

Conclusions

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Any Questions?

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