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Term Structure of Interest Rates Changes during International Financial Crisis: The Case of Argentina vs. USA

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Author Info

  • Marcelo Dabos

    (Department of Economics, Universidad de San Andres)

  • Federico Bugallo

    (Department of Economics, Universidad de San Andres)

Abstract

We bootstrapped spot rates for Argentinean and U.S. federal government debt instruments, and fitted them with smoothing cubic splines, a non-parametric method, to estimate the term structure of interest rates. When estimating the term structure one must decide how close should the data be fitted, considering that the curve should be flexible but should also maintain a certain degree of curve stiffness to identify misspriced securities. Smoothing cubic splines are a helpful tool to deal with this trade-off, since the degree of smoothing can be controlled with the smoothing parameter, which must be set between 0 and 1. Our approach is based on that presented by Fisher, Nychka and Zervos (1995); and to choose the “optimal” smoothing parameter value we applied both generalized cross validation and Reinsch’s (1967) methods. The work analyzes the contagion effects that recent international financial crises such as the “Tequila” Mexican crisis, the Asian crisis, the Russian crisis, and the Brazilian devaluation had on Argentinean and U.S. term structures. It also analyzes what happened during the dates in which the 1999 Argentinean President’s elections took place. We found that Argentinean curves changes were significant during all the crises, especially on short-term maturities. Nevertheless these changes were only temporary, since after some time, the curves went back to similar values and shapes to those that existed before the crises had begun. Finally, we applied a test for splines presented by Silverman (1985), based on Wahba’s (1983) previous results, to analyze if the term structure changes were statistically significant or not. The confidence bands calculated by this method resulted too wide, and consequently they could not discriminate among significant and not significant changes.

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc25.pdf
File Function: First version, 2000
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Bibliographic Info

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 25.

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Length: 57 pages
Date of creation: Apr 2000
Date of revision: Apr 2000
Handle: RePEc:sad:wpaper:25

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Keywords: interest rates; financial crisis; Argentina; USA;

References

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  1. William Roberds & Charles H. Whiteman, 1996. "Endogenous term premia and anomalies in the term structure of interest rates: explaining the predictability smile," Working Paper 96-11, Federal Reserve Bank of Atlanta.
  2. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
  3. Lin, Bing-Huei, 1999. "Fitting the term structure of interest rates for Taiwanese government bonds," Journal of Multinational Financial Management, Elsevier, vol. 9(3-4), pages 331-352, November.
  4. Gonzalez, Jorge & Spencer, Roger & Walz, Daniel, 1999. "The information in the Mexican term structure of interest rates: capital market implications," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 9(2), pages 149-161, April.
  5. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," Working Paper 97-10, Federal Reserve Bank of Atlanta.
  6. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
  7. Mark Fisher & Douglas Nychka & David Zervos, 1995. "Fitting the term structure of interest rates with smoothing splines," Finance and Economics Discussion Series 95-1, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.

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