A Multicountry Model of the Term Structures of Interest Rates with a GVAR

Candelon, Bertrand;Moura, Rubens
(2024) Journal of Financial Econometrics — Vol. 22, n° 5, p. 1558-1587 (2024)

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Abstract
Extant multicountry affine term structure models (ATSMs) handle global financial interdependence at the cost of increasing model dimensionality. To address this challenge, we propose a novel no-arbitrage ATSM with risk factor dynamics following a global vector-autoregressive (GVAR). Compared to referenced benchmarks, the GVAR-ATSM offers a more parsimonious representation, enables a faster estimation process, produces more precise model estimates, yields more plausible term premia dynamics, and improves bond yield out-of-sample forecasting. Furthermore, our empirical findings reveal the significant impact of China’s economic stances on Latin American yield curve dynamics, underscoring its importance as a global economic player.
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Candelon, B., & Moura, R. (2024). A Multicountry Model of the Term Structures of Interest Rates with a GVAR. Journal of Financial Econometrics, 22(5), 1558-1587. https://doi.org/10.1093/jjfinec/nbae008 (Original work published 2024)