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Exploration of the Brazilian Term Structure in a Hidden Markov Framework

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  • Richard Munclinger
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    Abstract

    We apply a hidden Markov model of the term structure to modeling the Brazilian swap rate curve. We examine the model''s characteristics and its performance in describing the cross-sectional and time-series dynamics of the term structure. Two regimes are identified, a high level and a high volatility regime and a low level and low volatility regime. Both regimes are persistent and are explained by the level and the slope of the term structure. The model is estimated using a Bayesian MCM algorithm that produces consistent standard errors and a reliable method for testing the differences between the model parameters.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/22.

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    Length: 31
    Date of creation: 01 Jan 2011
    Date of revision:
    Handle: RePEc:imf:imfwpa:11/22

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    Related research

    Keywords: Bonds; Economic models; Interest rates; parameters; probability; forecasting; covariance; statistics; markov process; markov chain; probabilities; time series; number of parameters; samples; equations; explanatory power; significance level; heteroscedasticity; standard errors; parameter vector; random walk; random numbers; kurtosis; diagonal matrix; econometrics; correlation; autocorrelation; correlations; random variable; point process; normal density; standard error; difference equations; predictability; probability model; markov processes; mathematics; vector autoregression; bayesian information criterion; prediction; comparative statistics; martingale; equation; normal distribution; covariances; marked point process; statistical methods; random variables; functional forms; functional form; bayesian analysis; number of variables;

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