A0324
Title: A multicountry model of the term structures of interest rates with a GVAR
Authors: Rubens Moura - Université catholique de Louvain (Belgium) [presenting]
Bertrand Candelon - IPAG business school (France)
Abstract: Global interdependencies have caused affine term structure models (ATSMs) to adopt a multicountry dimension. Nevertheless, recent referenced ATSMs face issues of tractability as the model dimension becomes larger. To close this gap, an ATSM is proposed in which the risk factor dynamics follow a global vector autoregressive (GVAR). ATSM-GVAR renders a parsimonious yield curve parametrization, which allows for a fast estimation process, enables meaningful statistical inference of economic relationships, and produces accurate bond yields out-of-sample forecasting. To empirically illustrate our novel ATSM, we build a markedly integrated economic system composed of three Latin American economies and China. We find that, consequent to its prominent role in the worldwide economy, China's economic stances have non-negligible impacts on Latin American yield curve dynamics.
