Recently, a myriad of factor models including macroeconomic variables have been proposed to analyze the yield curve. We present an alternative factor model where term structure movements are captured by Legendre polynomials mimicking the statistical factor movements identified by Litterman and Scheinkman (1991). We estimate the model with Brazilian Foreign Exchange Coupon data, adopting a Kalman filter, under two versions: the first uses only latent factors and the second includes macroeconomic variables. We study its ability to predict out-of-sample term structure movements, when compared to a random walk. We also discuss results on the impulse response function of macroeconomic variables.
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number
148.
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