Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/220260 
Year of Publication: 
2015
Series/Report no.: 
Discussion Paper No. 171
Publisher: 
Institute for Applied Economic Research (ipea), Brasília
Abstract: 
We use no arbitrage models with macro variables to study the interaction between the macroeconomy and the yield curve. This interaction is a key element for monetary policy and for forecasting. The model was used to analyze the Brazilian domestic financial market using a daily dataset and two versions of the model, one in continuous-time and estimated by maximum likelihood, and the other in discretetime and estimated by Monte Carlo Markov Chain (MCMC). Our objective is threefold: 1) To analyze the determinants of the Brazilian domestic term structure considering nominal shocks; 2) To compare the results of the discrete and the continuous time versions considering adherence, forecasting performance and monetary policy analysis; and 3) To evaluate the effect of restrictions on the transition and pricing equations over the model properties. Our main results are: 1) results from continuous and discrete versions are qualitatively and in most cases quantitatively equivalent; 2) Monetary Authorities are conservative in Brazil, smoothing short rate fluctuations; 3) inflation shock, or slope shock, depending on the model selected, are the main sources of long run fluctuations of nominal variables; and finally, 4) no arbitrage models showed lower forecasting performance than an unrestricted factor model.
JEL: 
C13
E43
E52
G12
Document Type: 
Working Paper

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