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A GARCH Approach to Modeling Chilean Long-Term Swap Yields

Author

Listed:
  • Tanweer Akram
  • Khawaja Mamun

Abstract

This paper econometrically models the dynamics of the Chilean interbank swap yields based on macroeconomic factors. It examines whether the month-over-month change in the short-term interest rate has a decisive influence on the long-term swap yield after controlling for other factors, such as the change in inflation, change in the growth of industrial production, change in the log of the equity price index, and change in the log of the exchange rate. It applies the generalized autoregressive conditional heteroskedasticity (GARCH) approach to model the dynamics of the long-term swap yield. The change in the short-term interest rate has an economically meaningful and statistically significant effect on the change of the interbank swap yield. This means that the Banco Central de Chile's (BCCH) monetary policy exerts an important influence on interbank swap yields in Chile.

Suggested Citation

  • Tanweer Akram & Khawaja Mamun, 2022. "A GARCH Approach to Modeling Chilean Long-Term Swap Yields," Economics Working Paper Archive wp_1008, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_1008
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    File URL: https://www.levyinstitute.org/pubs/wp_1008.pdf
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    References listed on IDEAS

    as
    1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    2. repec:cup:jfinqa:v:46:y:2011:i:06:p:1727-1754_00 is not listed on IDEAS
    3. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
    4. Chernenko, Sergey & Faulkender, Michael, 2011. "The Two Sides of Derivatives Usage: Hedging and Speculating with Interest Rate Swaps," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1727-1754, December.
    5. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    6. Bindseil, Ulrich, 2004. "Monetary Policy Implementation: Theory, past, and present," OUP Catalogue, Oxford University Press, number 9780199274543, Decembrie.
    7. Ilias Lekkos & Costas Milas, 2001. "Identifying the Factors that Affect Interest‐Rate Swap Spreads: Some Evidence from the United States and the United Kingdom," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(8), pages 737-768, August.
    8. Eli M Remolona & Philip D Wooldridge, 2003. "The euro interest rate swap market," BIS Quarterly Review, Bank for International Settlements, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Interest Rate Swaps; Swap Yield; Short-Term Interest Rate; Banco Central de Chile (BCCH); Chile;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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