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An Affine Model of the Term Structure of Interest Rates in Mexico

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  • Josué Fernando Cortés Espada
  • Manuel Ramos Francia
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    Abstract

    We develop and estimate an affine model that characterizes the dynamics of the term structure of interest rates in Mexico. Moreover, we provide empirical evidence on the relationship between the term structure factors and macroeconomic variables. First, we show that the model fits the data remarkably well. Second, we show that the first factor captures movements in the level of the yield curve, while the second factor captures movements in the slope of the curve. Third, the variance decomposition results show that the level factor accounts for a substantial part of the variance at the long end of the yield curve at all horizons. At short horizons, the slope factor accounts for much of the variance at the short end of the yield curve. Finally, we show that movements in the level of the yield curve are associated with movements in long-term inflation expectations, while movements in the slope of the curve are associated with movements in the short-term nominal interest rate.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7B9911E456-14AC-F6BE-FD81-B2BBF5C04D9B%7D.pdf
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    Bibliographic Info

    Paper provided by Banco de México in its series Working Papers with number 2008-09.

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    Date of creation: Jul 2008
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    Handle: RePEc:bdm:wpaper:2008-09

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    Web page: http://www.banxico.org.mx
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    Related research

    Keywords: No-Arbitrage; Latent Factors; Term-Structure;

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    References

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    1. Andrew Ang & Monika Piazzesi & Min Wei, 2003. "What does the yield curve tell us about GDP growth?," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    2. Hordahl, Peter & Tristani, Oreste & Vestin, David, 2006. "A joint econometric model of macroeconomic and term-structure dynamics," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 405-444.
    3. Antonio Moreno & Geert Bekaert & Seonghoon Cho, 2004. "New-Keynesian Macroeconomics and the Term Structure," 2004 Meeting Papers 388, Society for Economic Dynamics.
    4. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
    5. Josué Fernando Cortés Espada & Alberto Torres García & Manuel Ramos Francia, 2008. "An Empirical Analysis of the Mexican Term Structure of Interest Rates," Working Papers 2008-07, Banco de México.
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    Cited by:
    1. Santiago García-Verdú, 2011. "On the Term Structure of Interest Rates of the Mexican Government," Working Papers 2011-18, Banco de México.

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