The Cost Efficiency of UK Debt Management: A Recursive Modelling Approach

43 Pages Posted: 9 Feb 2001

See all articles by Patrick Coe

Patrick Coe

Carleton University - Department of Economics

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Shaun Vahey

University of Cambridge - Faculty of Economics and Politics; Reserve Bank of New Zealand - Research

Date Written: October 2000

Abstract

This paper presents an empirical analysis of the efficiency of the UK debt management authorities?s (DMA) behaviour from a cost minimisation perspective over the period January 1985 to March 1995. During this period, the maturity structure of the government?s bond portfolio was subject to frequent finetuning, aimed principally at lowering interest costs. We examine the efficiency of the DMA?s behaviour from a cost minimisation perspective. Using a bi-variate version of the recursive modelling procedure applied to forecasting stock returns by Pesaran and Timmermann (1995, 2000), we show that bond returns are forecastable but the predictive power of macroeconomic variables is time dependent. We simulate the impact of adjusting the bond portfolio in response to our forecasts. The simulated average interest costs are lower than those resulting from the DMA?s actual real-time behaviour. However, a substantial reduction in interest costs requires large monthly changes in the portfolio?s maturity structure.

Keywords: Government debt management, cost minimisation, recursive modelling

JEL Classification: E17, E44, G12, H63

Suggested Citation

Coe, Patrick James and Pesaran, M. Hashem and Vahey, Shaun, The Cost Efficiency of UK Debt Management: A Recursive Modelling Approach (October 2000). Available at SSRN: https://ssrn.com/abstract=258946

Patrick James Coe

Carleton University - Department of Economics ( email )

1125 Colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Shaun Vahey

University of Cambridge - Faculty of Economics and Politics

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Reserve Bank of New Zealand - Research ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand

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