A VAR analysis of interest rates in The Netherlands

Abstract

Analyses the empirical relation between the one‐month interest rate, the long‐term interest rate and the motgage rate in The Netherlands. To study the dynamic interactions between these variables, vector autoregressive techniques are used. Concentrates on the question of whether the mortgage rate dynamics can correctly be described by a one‐factor interest rate model. One‐factor interest rate models allow mathematical derivations of deterministic equations to price interest rate derivatives. Finds, however, that a single factor does not correctly describe the interest rate term structure. Hence, to model the mortgage rate dynamics accurately more factors should be included.