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Do U.S. factors impact the Brazilian yield curve? Evidence from a dynamic factor model

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  • Stona, Filipe
  • Caldeira, João F.

Abstract

This paper contributes to the literature on the relationship between the yield curve, macroeconomic variables, and the unexplored interactions with tae U.S. yield curve movements by focusing on an emerging market: Brazil. We incorporate factors for the U.S. yield curve and domestic macroeconomic variables into the Dynamic Nelson Siegel Model to explore comovements with the Brazilian yield curve. As noted here, foreign macroeconomic factors contain a lot of information about the domestic term structure of yields. The empirical results suggest that both American and macroeconomic components may explain the latent factors of the term structure; in particular, the U.S. factors influence the Brazilian yield curve, since almost half of the variance in the level factor was caused by movements in the U.S. curve. Furthermore, we find evidence that a specification with U.S. yield factors is better for short maturities and long forecasts horizons.

Suggested Citation

  • Stona, Filipe & Caldeira, João F., 2019. "Do U.S. factors impact the Brazilian yield curve? Evidence from a dynamic factor model," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 76-89.
    • Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:76-89
    DOI: 10.1016/j.najef.2019.01.010
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    2. Cavaca, Igor Bastos & Meurer, Roberto, 2021. "International monetary policy spillovers: Linkages between U.S. and South American yield curves," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 737-754.

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    More about this item

    Keywords

    Yield curve; State-space model; Cross-country comovement; Small open economy; Macro-finance; C58; E43; G12; G15;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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