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An Empirical Analysis of the Mexican Term Structure of Interest Rates

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  • Josué Fernando Cortés Espada
  • Alberto Torres García
  • Manuel Ramos Francia
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    Abstract

    We study the dynamics of the term-structure of interest rates in Mexico. Specifically, we investigate time variation in bond risk premia and the common factors that have influenced the behavior of the yield curve. We find that term-premia in government bonds appear to be time-varying. We then estimate a principal components model. We find that over 95% of the total variation in the yield curve can be explained by two factors. The first factor captures movements in the level of the yield curve, while the second one captures movements in the slope. Moreover, we find that the level factor is positively correlated with measures of long-term inflation expectations and that the slope factor is negatively correlated with the overnight interest rate.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BBF0DEA92-F647-4350-1100-942D520EC76D%7D.pdf
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    Bibliographic Info

    Paper provided by Banco de México in its series Working Papers with number 2008-07.

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    Date of creation: Jul 2008
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    Handle: RePEc:bdm:wpaper:2008-07

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    Web page: http://www.banxico.org.mx
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    Keywords: Term-Structure; Time-Varying Risk Premia; Principal Components;

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    References

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    1. Andrew Ang & Monika Piazzesi & Min Wei, 2004. "What Does the Yield Curve Tell us about GDP Growth?," NBER Working Papers 10672, National Bureau of Economic Research, Inc.
    2. Andrew Ang & Sen Dong & Monika Piazzesi, 2007. "No-Arbitrage Taylor Rules," NBER Working Papers 13448, National Bureau of Economic Research, Inc.
    3. Seonghoon Cho & Antonio Moreno & Geert Bekaert, 2005. "New-Keynesian Macroeconomics and the Term Structure," Faculty Working Papers 04/05, School of Economics and Business Administration, University of Navarra.
    4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    5. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Harvard Institute of Economic Research Working Papers 1713, Harvard - Institute of Economic Research.
    6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
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    Cited by:
    1. Josué Fernando Cortés Espada & Manuel Ramos Francia, 2008. "An Affine Model of the Term Structure of Interest Rates in Mexico," Working Papers 2008-09, Banco de México.

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