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Yield Curve Dynamics: Regional Common Factor Model

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Abstract

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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  • Boril Šopov & Jakub Seidler, 2010. "Yield Curve Dynamics: Regional Common Factor Model," Working Papers IES 2010/17, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2010.
    • Handle: RePEc:fau:wpaper:wp2010_17
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    1. Diebold, Francis X. & Li, Canlin & Yue, Vivian Z., 2008. "Global yield curve dynamics and interactions: A dynamic Nelson-Siegel approach," Journal of Econometrics, Elsevier, vol. 146(2), pages 351-363, October.
    2. Arnaud Mehl, 2009. "The Yield Curve as a Predictor and Emerging Economies," Open Economies Review, Springer, vol. 20(5), pages 683-716, November.
    3. Francis X. Diebold & Lei Ji & Canlin Li, 2006. "A Three-Factor Yield Curve Model: Non-Affine Structure, Systematic Risk Sources and Generalized Duration," Chapters, in: Lawrence R. Klein (ed.), Long-run Growth and Short-run Stabilization, chapter 9, Edward Elgar Publishing.
    4. 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.
    5. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    6. Durbin, James & Koopman, Siem Jan, 2012. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, edition 2, number 9780199641178.
    7. Mr. Willy A Hoffmaister & Mr. Jorge Roldos & Ms. Anita Tuladhar, 2010. "Yield Curve Dynamics and Spillovers in Central and Eastern European Countries," IMF Working Papers 2010/051, International Monetary Fund.
    8. Zoltán Reppa, 2009. "A joint macroeconomic-yield curve model for Hungary," MNB Working Papers 2009/1, Magyar Nemzeti Bank (Central Bank of Hungary).
    9. Siem Jan Koopman & Neil Shephard & Jurgen A. Doornik, 1999. "Statistical algorithms for models in state space using SsfPack 2.2," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 107-160.
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    1. repec:cnb:ocpubv:rb12/2 is not listed on IDEAS
    2. repec:cnb:ocpubv:rb11/2 is not listed on IDEAS
    3. repec:cnb:ocpubv:rb10/2 is not listed on IDEAS
    4. repec:cnb:ocpubv:rb10/1 is not listed on IDEAS
    5. Lubomira Gertler, 2015. "Interactions of Unconventional Monetary Policy Measures with the Euro Area Yield Curve," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 65(2), pages 106-126, March.
    6. repec:cnb:ocpubv:rb12/1 is not listed on IDEAS
    7. repec:cnb:ocpubv:rb11/1 is not listed on IDEAS
    8. Vilimir Yordanov, 2012. "The Bulgarian Foreign and Domestic Debt ??? A No-Arbitrage Macrofinancial View," William Davidson Institute Working Papers Series wp1032, William Davidson Institute at the University of Michigan.

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    More about this item

    Keywords

    Dynamic Factor Model; Kalman Filter; Nelson-Siegel; State Space; Regional Yield Curve; Principal Component Analysis;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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