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A Convergence Model of the Term Structure of Interest Rates

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Author Info
Viktors Ajevskis
Kristine Vitola

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Abstract

This paper develops a convergence model of the term structure of interest rates in the context of entering the EMU. Compared with the other models developed so far in this field, our model specification ensures convergence of the domestic short-term interest rates to the euro area ones. We achieve this convergence by stating that the spread between the domestic and euro short-term interest rates follows the Brownian bridge process. We also develop an econometric counterpart of the theoretical model. To address the problem of nonstationarity and nonlinearity of the model, the extended Kalman filter for coefficient estimation is applied.

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Paper provided by Latvijas Banka in its series Working Papers with number 2009/01.

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Date of creation: 09 Feb 2009
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Handle: RePEc:ltv:wpaper:200901

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Related research
Keywords: term structure of interest rates; the Brownian bridge; the EMU; nonlinear Kalman filter;

Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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This page was last updated on 2009-12-3.

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