Affiliation:
1. LFIN/LIDAM, UCLouvain , Louvain-la-Neuve, Belgium
2. Banco de Mexico , Mexico City, Mexico
Abstract
Abstract
Extant multicountry affine term structure models (ATSMs) handle global financial interdependence at the cost of increasing model dimensionality. To address this challenge, we propose a novel no-arbitrage ATSM with risk factor dynamics following a global vector-autoregressive (GVAR). Compared to referenced benchmarks, the GVAR − ATSM offers a more parsimonious representation, enables a faster estimation process, produces more precise model estimates, yields more plausible term premia dynamics, and improves bond yield out-of-sample forecasting. Furthermore, our empirical findings reveal the significant impact of China’s economic stances on Latin American yield curve dynamics, underscoring its importance as a global economic player.
Publisher
Oxford University Press (OUP)
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