NEGATIVE INTEREST RATES EFFECT ON BOND CORRELATION

Open Access
Author:
Ciccotelli, Eric
Area of Honors:
Finance
Degree:
Bachelor of Science
Document Type:
Thesis
Thesis Supervisors:
  • Jingzhi Huang, Thesis Supervisor
  • Brian Davis, Honors Advisor
Keywords:
  • Interest Rates
  • Negative Interest Rates
  • Economy
  • Exchange Rate
  • Switzerland
  • Japan
  • Bond Yield
  • Maturity
Abstract:
The directive of this paper concerns analyzing the effect of a change to a negative interest rate environment primarily in the countries of Switzerland and Japan with the countries of the United Kingdom and United States presented as a base. My topic encompasses analyzing the factors in each economy that make negative interests rates possible and viable. This is a topic that is particularly interesting to me as both a Finance Major and Economics Minor. Originally, during the time of my gateway application, I had contemplated one question: Why are negative interest rates emerging in our markets today for the first time in history? I had remembered readings outlining economic principles from men the likes of Keynes establishing a “Zero-Bound” on interest rates, "Like other academic economists, I [Keynes] treated his [Gesell's] profoundly original strivings (referring to his notes on negative interest rates) as being no better than those of a crank." These men asserted that passing a zero-bound would ultimately result in a phenomenon called a liquidity trap. Like it sounds, when hitting the threshold of a liquidity trap, an economy would experience such high inflation that the economy would cease to operate properly. My original question is: what changed in our world economies that it allowed specific countries to bypass these age-old rules of operation? As it turns out, it is exceedingly hard to determine at just what level an economy would hit this trap and cease to exist. What we can do, however, is to examine the factors that allowed a negative interest rate environment to exist and see what common factors there are between economies. Additionally, we can examine the cross from a time period of positive interest rates into negative interest rates and find out from an investor’s perspective why and how an institution would decide to invest in negative interest rate bonds and the effect that this change has had on bond correlations.