Yield Curve Dynamics: Regional Common Factor Model
AbstractIn this paper, we focus on thorough yield curve modelling. We build on extended classical Nelson-Siegel model, which we further develop to accommodate unobserved regional common factors. We centre our discussion on Central European currencies’ yield curves: CZK, HUF, PLN and SKK. We propose a model to capture regional dynamics purely based on state space formulation. The contribution of this paper is twofold: we examine regional yield curve dynamics and we quantify regional interdependencies amongst considered currencies’ yield curves. We conclude that the CZK yield curve possesses its own dynamics corresponding to country specific features, whereas other currencies’ yield curves are strongly influenced by the regional level, the regional slope factor or both.
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Bibliographic InfoPaper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2010/17.
Date of creation: Aug 2010
Date of revision: Aug 2010
Dynamic Factor Model; Kalman Filter; Nelson-Siegel; State Space; Regional Yield Curve; Principal Component Analysis;
Other versions of this item:
- Boril Šopov & Jakub Seidler, 2011. "Yield Curve Dynamics - Regional Common Factor Model," Prague Economic Papers, University of Economics, Prague, vol. 2011(2), pages 140-156.
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-11 (All new papers)
- NEP-FMK-2010-09-11 (Financial Markets)
- NEP-IFN-2010-09-11 (International Finance)
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