Abstract
In this article we analyse the term structure of the Italian Government bonds after the adoption of Euro currency. In such a framework, we make use of the CIR model and deal with the degree of different volatilities of the maturities considered. To cope with this problem, we propose a simple correction formula and make use of a reaction function to take into account the influence of the monetary policy of the ECB with the result of considerably improving the performance of the model.
Acknowledgements
We thank the Italian Public Debt Department at the Ministry for Economy for the support given and for extremely helpful suggestions and comments. In particular we are indebted to S. Scalera, M. Turco, S. Ginebri, P. Papi and the team of IAC. The Public Debt Department is devoting strong attention to the topic of Debt Management by considering several research areas in this respect. Specifically, the reaction of the PSBR to the cycle, the effects of the possible market forms on the Treasury bond prices, the modelization of Treasury bonds’ interest rates and an intertemporal optimization model for optimal control issuances of Treasury bonds. The usual disclaimer always applies. This research has been conducted with the joint contribution of the authors although paragraphs Introduction, 2, 4 are attributed to B. Maggi and 1, 3, 5 to F. Infortuna.
Notes
1We verify the validity of this assumption for our case study.
2We prefer to consider a shorter sample period till the end of 2002 for estimation purposes. In particular, two remarkable events happened after that for the Italian Government bonds. The ‘overpricing’ between secondary and primary Italian market and the unexpected change in prices of bonds in August 2004 due to particular aspects of some procedure for the assignment of the securities in the market. These facts should be taken into account in the model to explain the change in prices and in interest rates but, given the peculiarity of such problems, we prefer to ignore them by simply reducing the sample size provided it is sufficiently large to estimate the model.
3On this problem, see Maggi et al. (Citation2005) where Italian Government Budget is forecasted, with an automatic reaction to national cycle and inflation, considering only its real items.