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Title:An interpretation of an affine term structure model for Chile PDF Logo
Authors:Ochoa, J. Marcelo
Issue Date:2006
Citation:[Journal:] Estudios de Economía [ISSN:] 0718-5286 [Volume:] 33 [Year:] 2006 [Issue:] 2 [Pages:] 155-184
Abstract:This paper attempts to provide an economic interpretation of the factors that drive the movements of interest rates of bonds of different maturities in a continuous-time no-arbitrage term structure model for Chile. The dynamics of yields in the model are explained by two latent factors, namely the instantaneous short rate and its time-varying central tendency. The model estimates suggest that the short end of the yield curve is mainly driven by changes in first latent factor, while long-term interest rates are mainly explained by the second latent factor. Consequently, when examining movements in the term structure, one should think of at least two forces that hit the economy: temporary shocks that change short-term and medium-term interest rates by much larger amounts than long-term interest rates, causing changes in the slope of the yield curve; and long-lived innovations which have persistent effects on the level of the yield curve.
Subjects:affine term structure model
yield curve
Kalman filter
JEL:C33
E43
E44
E2
G12
Document Type:Article
Appears in Collections:Estudios de Economia, Department of Economics, University of Chile

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