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A Polynomial Term Structure Model with Macroeconomic Variables

Author

Listed:
  • Felipe Pinheiro

    (Banco Credit Suisse)

  • Caio Ibsen Rodrigues de Almeida

    (EPGE/FGV)

  • José Valentim Vicente

    (Banco Central do Brasil)

Abstract

Recently, a myriad of factor models including macroeconomic variables have been proposed to analyze the yield curve. We present an alternative factor model where term structure movements are captured by Legendre polynomials mimicking the statistical factor movements identified by Litterman e Scheinkmam (1991). We estimate the model with Brazilian Foreign Exchange Coupon data, adopting a Kalman filter, under two versions: the first uses only latent factors and the second includes macroeconomic variables. We study its ability to predict out-of-sample term structure movements, when compared to a random walk. We also discuss results on the impulse response function of macroeconomic variables.

Suggested Citation

  • Felipe Pinheiro & Caio Ibsen Rodrigues de Almeida & José Valentim Vicente, 2007. "A Polynomial Term Structure Model with Macroeconomic Variables," Brazilian Review of Finance, Brazilian Society of Finance, vol. 5(1), pages 79-92.
    • Handle: RePEc:brf:journl:v:5:y:2007:i:1:p:79-92
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    More about this item

    Keywords

    factor models; parametric term structure models; yield curve forecasting; Kalman filter;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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