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Yield Curve Dynamics - Regional Common Factor Model

  • Boril Šopov
  • Jakub Seidler

In this paper, we focus on thorough yield curve modelling. We build on extended classical Nelson-Siegel model, which we further develop to accommodate unobserved regional common factors. We centre our discussion on Central European currencies´ yield curves: CZK, HUF, PLN and SKK. We propose a model to capture regional dynamics purely based on state space formulation. The contribution of this paper is twofold: we examine regional yield curve dynamics and we quantify regional interdependencies amongst considered currencies´ yield curves. We conclude that the CZK yield curve possesses its own dynamics corresponding to country specific features, whereas other currencies´ yield curves are strongly influenced by the regional level, the regional slope factor or both.

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Article provided by University of Economics, Prague in its journal Prague Economic Papers.

Volume (Year): 2011 (2011)
Issue (Month): 2 ()
Pages: 140-156

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Handle: RePEc:prg:jnlpep:v:2011:y:2011:i:2:id:393:p:140-156
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  1. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
  2. Mehl, Arnaud, 2006. "The yield curve as a predictor and emerging economies," Working Paper Series 0691, European Central Bank.
  3. repec:mnb:wpaper:2009/1 is not listed on IDEAS
  4. Francis X. Diebold & Canlin Li & Vivian Z. Yue, 2007. "Global Yield Curve Dynamics and Interactions: A Dynamic Nelson-Siegel Approach," NBER Working Papers 13588, National Bureau of Economic Research, Inc.
  5. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
  6. Alexander W. Hoffmaister & Jorge Roldos & Anita Tuladhar, 2010. "Yield Curve Dynamics and Spillovers in Central and Eastern European Countries," IMF Working Papers 10/51, International Monetary Fund.
  7. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543, July.
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