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Abstract

In 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 Info

Paper provided by Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies in its series Working Papers IES with number 2010/17.

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Length: 21pages
Date of creation: Aug 2010
Date of revision: Aug 2010
Handle: RePEc:fau:wpaper:wp2010_17

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Related research

Keywords: Dynamic Factor Model; Kalman Filter; Nelson-Siegel; State Space; Regional Yield Curve; Principal Component Analysis;

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Find related papers by JEL classification:

• 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)

References

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1. Francis X. Diebold & Canlin Li, 2004. "Forecasting the Term Structure of Government Bond Yields," CFS Working Paper Series 2004/09, Center for Financial Studies.
   
   • Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
   • Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
   • Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
2. Francis X. Diebold & Canlin Li & Vivian Z. Yue, 2007. "Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach," PIER Working Paper Archive 07-030, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
   
   • Diebold, Francis X. & Li, Canlin & Yue, Vivian Z., 2008. "Global yield curve dynamics and interactions: A dynamic Nelson-Siegel approach," Journal of Econometrics, Elsevier, vol. 146(2), pages 351-363, October.
   • Francis X. Diebold & Canlin Li & Vivian Z. Yue, 2007. "Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach," NBER Working Papers 13588, National Bureau of Economic Research, Inc.
3. Alexander W. Hoffmaister & Jorge Roldos & Anita Tuladhar, 2010. "Yield Curve Dynamics and Spillovers in Central and Eastern European Countries," IMF Working Papers 10/51, International Monetary Fund.
4. Zoltán Reppa, 2009. "A joint macroeconomic-yield curve model for Hungary," MNB Working Papers 2009/1, Magyar Nemzeti Bank (the central bank of Hungary).
5. Mehl, Arnaud, 2006. "The yield curve as a predictor and emerging economies," BOFIT Discussion Papers 18/2006, Bank of Finland, Institute for Economies in Transition.
   
   • Arnaud Mehl, 2009. "The Yield Curve as a Predictor and Emerging Economies," Open Economies Review, Springer, vol. 20(5), pages 683-716, November.
   • Arnaud Mehl, 2006. "The yield curve as a predictor and emerging economies," Working Paper Series 691, European Central Bank.
6. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
   
   • Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
7. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543, July.
   
   • Tom Doan, . "SEASONALDLM: RATS procedure to create the matrices for the seasonal component of a DLM," Statistical Software Components RTS00251, Boston College Department of Economics.

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Cited by:

1. Katerina Arnostova & Jozef Barunik & Jan Filacek & Michal Franta & David Havrlant & Roman Horvath & Filip Novotny & Marie Rakova & Lubos Ruzicka & Branislav Saxa & Katerina Smidkova & Peter Toth, 2012. "Macroeconomic Forecasting: Methods, Accuracy and Coordination," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 1, volume 10, number rb10/1 edited by Jan Babecky, May.
2. Vilimir Yordanov, 2012. "The Bulgarian Foreign and Domestic Debt – A No-Arbitrage Macrofinancial View," William Davidson Institute Working Papers Series wp1032, William Davidson Institute at the University of Michigan.
3. Jose Peydro Alcalde & Sona Benecka & Alexis Derviz & Adam Gersl & Tomas Holub & Roman Horvath & Petr Jakubik & Narcisa Liliana Kadlcakova & Dorota Kowalczyk & Ivana Kubicova & Steven Ongena & Jakub Ry, 2012. "Financial Stability and Monetary Policy," Occasional Publications - Edited Volumes, Czech National Bank, Research Department, edition 2, volume 10, number rb10/2 edited by Jan Babecky & Roman Horvath, May.

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