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Abstract

This paper attempts to provide an economic interpretation of the factors that drive the movements of interest rates of bonds of different maturities in a continuous-time no-arbitrage term structure model for Chile. The dynamics of yields in the model are explained by two latent factors, namely the instantaneous short rate and its time-varying central tendency. The model estimates suggest that the short end of the yield curve is mainly driven by changes in first latent factor, while long-term interest rates are mainly explained by the second latent factor. Consequently, when examining movements in the term structure, one should think of at least two forces that hit the economy: temporary shocks that change short-term and medium-term interest rates by much larger amounts than long-term interest rates, causing changes in the slope of the yield curve; and long-lived innovations which have persistent effects on the level of the yield curve.

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Bibliographic Info

Article provided by University of Chile, Department of Economics in its journal Estudios de Economia.

Volume (Year): 33 (2006)
Issue (Month): 2 Year 2006 (December)
Pages: 155-184

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Handle: RePEc:udc:esteco:v:33:y:2006:i:2:p:155-184

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Web page: http://www.econ.uchile.cl/
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Related research

Keywords: Affine term structure model; yield curve; Kalman filter.;

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Find related papers by JEL classification:

• C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
• E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
• E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
• E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment
• G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

References

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Cited by:

1. Alfaro, Rodrigo & Becerra, Juan Sebastian & Sagner, Andres, 2010. "Estimación de la estructura de tasas utilizando el modelo Dinámico Nelson Siegel: resultados para Chile y EEUU
   [The Dynamic Nelson-Siegel model: empirical results for Chile and US]," MPRA Paper 25912, University Library of Munich, Germany, revised 23 Jun 2010.

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