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An Interpretation of An Affine Term Structure Model for Chile

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  • Juan Marcelo, Ochoa

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

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Cited by:
  1. Alfaro, Rodrigo & Becerra, Juan Sebastian & Sagner, Andres, 2010. "Estimación de la estructura de tasas utilizando el modelo Dinámico Nelson Siegel: resultados para Chile y EEUU
    [The Dynamic Nelson-Siegel model: empirical results for Chile and US]
    ," MPRA Paper 25912, University Library of Munich, Germany, revised 23 Jun 2010.
  2. Rodrigo Alfaro, 2009. "The Yield Curve Under Nelson-Siegel," Working Papers Central Bank of Chile, Central Bank of Chile 531, Central Bank of Chile.
  3. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2013. "On the Stratonovich – Kalman - Bucy filtering algorithm application for accurate characterization of financial time series with use of state-space model by central banks," MPRA Paper 50235, University Library of Munich, Germany.

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