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Term Structure of Interest Rates in Costa Rican Colones (Zero-Coupon Curve): Methodology and Derivation of Forward Rates and the Exchange Risk Premium

Author

Listed:
  • Juan José Víquez-Rodríguez

    (Department of Economic Research, Central Bank of Costa Rica)

  • Laura Campos-Quesada

    (University of Costa Rica)

  • Isaac Zúñiga-Arias

    (University of Costa Rica)

Abstract

The current document consolidates the fundamental theoretical definitions for constructing the Zero-Coupon Curve in colones for the Costa Rican economy. Initially, the theoretical foundations supporting the employed methodology are presented, and the modeling of the zero-coupon curve is established, specifically adjusted for Costa Rican secondary market transactions. This includes specifying the no-arbitrage conditions that must be followed during optimization to ensure that the resulting curve aligns coherently with the theory. Subsequently, the heuristic methods used in optimizing the parameters of Svensson and Nelson-Siegel curves with constraints are explained. Finally, indicators and associated curves are developed, such as Par Yield Curve, forward rates and exchange risk premium. ***Resumen: El presente documento consolida las definiciones teóricas fundamentales para la construcción de la Curva Cero Cupón en colones para la economía costarricense. Inicialmente se presentan los fundamentos teóricos que respaldan la metodología empleada y se establece la modelación de la curva cero cupón ajustada para las transacciones de mercado secundario costarricense, especificando las condiciones de no arbitraje que deben ser seguidas por la optimización para asegurar que la curva obtenida al final sea coherente con la teoría. Posteriormente, se explican los métodos heurísticos utilizados en la optimización de los parámetros de las curvas Svensson y Nelson-Siegel con restricciones. Finalmente, se desarrollan indicadores y curvas asociadas, tales como la Curva Par, las tasas forward y la prima por riesgo cambiario.

Suggested Citation

  • Juan José Víquez-Rodríguez & Laura Campos-Quesada & Isaac Zúñiga-Arias, 2025. "Term Structure of Interest Rates in Costa Rican Colones (Zero-Coupon Curve): Methodology and Derivation of Forward Rates and the Exchange Risk Premium," Documentos de Trabajo 2508, Banco Central de Costa Rica.
    • Handle: RePEc:apk:doctra:2508
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    References listed on IDEAS

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    1. Fuchang Gao & Lixing Han, 2012. "Implementing the Nelder-Mead simplex algorithm with adaptive parameters," Computational Optimization and Applications, Springer, vol. 51(1), pages 259-277, January.
    2. Svensson, Lars E O, 1994. "Estimating and Interpreting Forward Interest Rates: Sweden 1992-4," CEPR Discussion Papers 1051, C.E.P.R. Discussion Papers.
    3. Ricardo Reis, 2015. "Different Types of Central Bank Insolvency and the Central Role of Seignorage," NBER Working Papers 21226, National Bureau of Economic Research, Inc.
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    5. Bank for International Settlements, 2005. "Zero-coupon yield curves: technical documentation," BIS Papers, Bank for International Settlements, number 25, November.
    6. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    7. David Bolder & David Stréliski, 1999. "Yield Curve Modelling at the Bank of Canada," Technical Reports 84, Bank of Canada.
    8. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
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    JEL classification:

    • 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
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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