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Macro Factors and the Brazilian Yield Curve With no Arbitrage Models

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  • Marcos S. Matsumura
  • Ajax R. B. Moreira

Abstract

We use no arbitrage models with macro variables to study the interaction between the macroeconomy and the yield curve. This interaction is a key element for monetary policy and for forecasting. The model was used to analyze the Brazilian domestic financial market using a daily dataset and two versions of the model, one in continuous-time and estimated by maximum likelihood, and the other in discretetime and estimated by Monte Carlo Markov Chain (MCMC). Our objective is threefold: 1) To analyze the determinants of the Brazilian domestic term structure considering nominal shocks; 2) To compare the results of the discrete and the continuous time versions considering adherence, forecasting performance and monetary policy analysis; and 3) To evaluate the effect of restrictions on the transition and pricing equations over the model properties. Our main results are: 1) results from continuous and discrete versions are qualitatively and in most cases quantitatively equivalent; 2) Monetary Authorities are conservative in Brazil, smoothing short rate fluctuations; 3) inflation shock, or slope shock, depending on the model selected, are the main sources of long run fluctuations of nominal variables; and finally, 4) no arbitrage models showed lower forecasting performance than an unrestricted factor model.

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Bibliographic Info

Paper provided by Instituto de Pesquisa Econômica Aplicada - IPEA in its series Discussion Papers with number 1210.

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Length: 37 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:ipe:ipetds:1210

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  1. Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 20(3), pages 381-408, June.
  2. Andrew Ang & Sen Dong & Monika Piazzesi, 2007. "No-Arbitrage Taylor Rules," NBER Working Papers 13448, National Bureau of Economic Research, Inc.
  3. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(4), pages 745-787, May.
  4. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
  5. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, Wiley Blackwell, vol. 6(4), pages 379-406.
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Cited by:
  1. Barbedo, Claudio H.S. & de Melo, Eduardo F.L., 2012. "Joint dynamics of Brazilian interest rate yields and macro variables under a no-arbitrage restriction," Journal of Economics and Business, Elsevier, Elsevier, vol. 64(5), pages 364-376.
  2. Marco S. Matsumura, 2006. "Impact of Macro Shocks on Sovereign Default Probabilities," Discussion Papers, Instituto de Pesquisa Econômica Aplicada - IPEA 1241, Instituto de Pesquisa Econômica Aplicada - IPEA.
  3. Rodrigo Cabral & Richard Munclinger & Luiz Alves & Marco Rodriguez Waldo, 2011. "On Brazil’s Term Structure," IMF Working Papers 11/113, International Monetary Fund.
  4. Flávio de Freitas Val & Claudio Henrique da Silveira Barbedo & Marcelo Verdini Maia, 2011. "Inflation expectation and implicit inflation: does market research provide accurate measures?," Brazilian Business Review, Fucape Business School, vol. 8(3), pages 83-100, July.

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