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An Interpretation of An Affine Term Structure Model for Chile

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Author Info
Juan Marcelo, Ochoa

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Abstract

This paper attempts to provide an economic interpretation of the factors that drive the movements of interest rates of bonds of different maturities in a continuous-time no arbitrage term structure model for Chile. The dynamics of yields in the model are explained by two latent factors, namely the instantaneous short rate and its time-varying central tendency. The model estimates suggest that the short end of the yield curve is mainly driven by changes in first latent factor, while long-term interest rates are mainly explained by the second latent factor. Consequently, when examining movements in the term structure, one should think of at least two forces that hit the economy: temporary shocks that change short-term and medium-term interest rates by much larger amounts than long-term interest rates, causing changes in the slope of the yield curve; and long-lived innovations which have persistent effects on the level of the yield curve.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1072.

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Date of creation: Nov 2006
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Handle: RePEc:pra:mprapa:1072

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Related research
Keywords: Affine term structure model; yield curve; Kalman filter;

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Find related papers by JEL classification:
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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