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An Empirical Analysis of the Mexican Term Structure of Interest Rates

  • Josué Fernando Cortés Espada
  • Alberto Torres García
  • Manuel Ramos Francia
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    We study the dynamics of the term-structure of interest rates in Mexico. Specifically, we investigate time variation in bond risk premia and the common factors that have influenced the behavior of the yield curve. We find that term-premia in government bonds appear to be time-varying. We then estimate a principal components model. We find that over 95% of the total variation in the yield curve can be explained by two factors. The first factor captures movements in the level of the yield curve, while the second one captures movements in the slope. Moreover, we find that the level factor is positively correlated with measures of long-term inflation expectations and that the slope factor is negatively correlated with the overnight interest rate.

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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BBF0DEA92-F647-4350-1100-942D520EC76D%7D.pdf
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    Paper provided by Banco de México in its series Working Papers with number 2008-07.

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    Date of creation: Jul 2008
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    Handle: RePEc:bdm:wpaper:2008-07
    Contact details of provider: Web page: http://www.banxico.org.mx

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    1. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
    2. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    3. Andrew Ang & Sen Dong & Monika Piazzesi, 2005. "No-arbitrage Taylor rules," Proceedings, Federal Reserve Bank of San Francisco.
    4. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2005. "New-Keynesian Macroeconomics and the Term Structure," NBER Working Papers 11340, National Bureau of Economic Research, Inc.
    5. John Y. Campbell, 1995. "Some Lessons from the Yield Curve," Journal of Economic Perspectives, American Economic Association, vol. 9(3), pages 129-152, Summer.
    6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
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