Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/83760
Authors: 
Cortés Espada, Josué Fernando
Ramos-Francia, Manuel
Year of Publication: 
2008
Series/Report no.: 
Working Papers, Banco de México 2008-09
Abstract: 
We develop and estimate an affine model that characterizes the dynamics of the term structure of interest rates in Mexico. Moreover, we provide empirical evidence on the relationship between the term structure factors and macroeconomic variables. First, we show that the model fits the data remarkably well. Second, we show that the first factor captures movements in the level of the yield curve, while the second factor captures movements in the slope of the curve. Third, the variance decomposition results show that the level factor accounts for a substantial part of the variance at the long end of the yield curve at all horizons. At short horizons, the slope factor accounts for much of the variance at the short end of the yield curve. Finally, we show that movements in the level of the yield curve are associated with movements in long-term inflation expectations, while movements in the slope of the curve are associated with movements in the short-term nominal interest rate.
Subjects: 
No-Arbitrage
Latent Factors
Term-Structure
JEL: 
C13
E43
G12
Document Type: 
Working Paper
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