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Abstract:
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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. |