The real yield curve and macroeconomic factors in the Chilean economy

Abstract

This article estimates a dynamic model for the yield curve incorporating latent and macro factors to represent the term structure of the real interest rates. The representation of the yield curve is based on the popular latent factor model of Nelson and Siegel (1987), but under a dynamic interpretation due to Diebold and Li (2006). After assuming the data generating process for the latent and macro factors can be represented by a VAR process, the yields-macro model can be regarded as a state-space representation and estimated by a Kalman Filter approach or by using a simplified two-step procedure proposed by Diebold and Li (2006). This article follows the simple two-step method and makes a comparison check with the Kalman Filter estimation, concluding that the basic intuition of the results is not significantly affected by the use of the simplified approach. Estimation results give support to the dynamic interaction between yield curve latent factors and macroeconomic variables. In particular, monetary policy implemented by the Central Bank seems to be influenced by the market players given the significant response of the monetary policy rate to the yield curve factors as shown by impulse-response functions. In addition, the level and slope of the yield curve seems to be responsive to real activity and monetary policy shocks, issues that should be considered by monetary authorities given the dependency of monetary policy effectiveness on the shape of the yield curve.

Nominal term structure and term premia: evidence from Chile

“…The author concludes that the dynamics of yields are explained by two latent factors, but no identification of term premia was examined. Finally, the economic iteration between the term structure and macroeconomic variables has been reported extensively in Chile (see Ochoa (2006), Morales (2010), Alfaro et al (2011) and (Ceballos 2014)) although there is no term premia derivation. Thus, to the best of our knowledge, this is the first paper attempting to decompose and analyze the term premia in the nominal interest rates in Chile.…”

Title: analysis of term structure of interest rates in Latin America countries from 2006 to 2014

“…Para as economias chilena e mexicana, alguns trabalhos recentes destacam-se, como os de Morales (2010), Ceballos (2014), e Cortés Espada e Ramos-Francia (2008;2009). No caso do Chile, Morales (2010) utilizou de um modelo VAR, com aplicação de filtro de Kalman, de forma que as estimações realizadas dão suporte à interação dinâmica entre os fatores latentes da curva de juros e variáveis macroeconômicas.…”

“…Shousha (2008) e Bernz (2014) avaliaram a relação da estrutura termo para a economia brasileira. As variáveis macroeconômicas também determinam o movimento e o formato da curva de juros, de acordo com os achados de Morales (2010) e Ceballos (2014) para economia chilena, e de Cortés Espada e Ramos-Francia (2008) e Cortés Espada e Ramos-Francia (2009) para o México. Ceballos (2014) examinou qual o impacto de anúncios nacionais e internacionais, relativos com a macroeconomia, sobre a curva de juros do Chile.…”

The Yield Curve Factors and Economic Surprises in the Chilean Bond Market

“…Ochoa (2006) estimates the factors of yield curve using a no-arbitrage model, concluding that these factors correspond to the instantaneous rate and central tendency. Morales (2010) estimates the model proposed by Diebold and Li (2006) for monthly real rates in Chile and reported the dynamics of some macroeconomic variables and yield curve factors using a Kalman filter and two-step approach. Finally, Alfaro et al (2011) estimates a discrete version of the dynamic Nelson-Siegel model, reporting the jointly dynamics between yield curve factors and macroeconomic variables in monthly nominal interest rates.…”