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Joint dynamics of Brazilian interest rate yields and macro variables under a no-arbitrage restriction

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  • Barbedo, Claudio H.S.
  • de Melo, Eduardo F.L.

Abstract

This work combines macroeconomic factors and an arbitrage-free model of bond yields to explain the behavior of dollar interest rate contracts traded in Brazil. We relax restrictions that macroeconomic and latent variables are independent of each other and of the policy interest rate. The results show that the Ang and Piazzesi (Ang & Piazzesi, 2003) model is more accurate than the random walking model and provides a good forecast of the interest rate sign changes when we consider conditional dependence among latent and macroeconomic variables.

Suggested Citation

  • Barbedo, Claudio H.S. & de Melo, Eduardo F.L., 2012. "Joint dynamics of Brazilian interest rate yields and macro variables under a no-arbitrage restriction," Journal of Economics and Business, Elsevier, vol. 64(5), pages 364-376.
  • Handle: RePEc:eee:jebusi:v:64:y:2012:i:5:p:364-376
    DOI: 10.1016/j.jeconbus.2012.06.001
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    References listed on IDEAS

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    1. Marcos S. Matsumura & Ajax R. B. Moreira, 2006. "Macro Factors and the Brazilian Yield Curve With no Arbitrage Models," Discussion Papers 1210, Instituto de Pesquisa Econômica Aplicada - IPEA.
    2. Hordahl, Peter & Tristani, Oreste & Vestin, David, 2006. "A joint econometric model of macroeconomic and term-structure dynamics," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 405-444.
    3. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
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    12. Eduardo J. A. Lima & Felipe Luduvice & Benjamin M. Tabak, 2006. "Forecasting Interest Rates: an application for Brazil," Working Papers Series 120, Central Bank of Brazil, Research Department.
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    More about this item

    Keywords

    Interest rate term structure; Macroeconomic variables; No-arbitrage;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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