A Multicountry Model of the Term Structures of Interest Rates with a GVAR

Author:

Candelon Bertrand1,Moura Rubens2ORCID

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)

Reference53 articles.

1. Global Factors in the Term Structure of Interest Rates;Abbritti;International Journal of Central Banking,2018

2. Pricing the Term Structure with Linear Regressions;Adrian;Journal of Financial Economics,2013

3. A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables;Ang;Journal of Monetary Economics,2003

4. What Does the Yield Curve Tell Us about GDP Growth;Ang;Journal of Econometrics,2006

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