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Estimation of Peru’s sovereign yield curve: the role of macroeconomic and latent factors

Olivares Rios, A., Rodríguez, G. and Ataurima Arellano, M. (2019) Estimation of Peru’s sovereign yield curve: the role of macroeconomic and latent factors. Journal of Economic Studies, 46 (3). pp. 533-563. ISSN 0144-3585

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Identification Number: 10.1108/JES-04-2017-0089

Abstract

Purpose: Following Ang and Piazzesi’s (2003) study, the authors use an affine term structure model to study the relevance of macroeconomic (domestic and foreign) factors for Peru’s sovereign yield curve in the period from November 2005 to December 2015. The paper aims to discuss this issue. Design/methodology/approach: Risk premia are modeled as time-varying and depend on both observable and unobservable factors; and the authors estimate a vector autoregressive model considering no-arbitrage assumptions. Findings: The authors find evidence that macro factors help to improve the fit of the model and explain a substantial amount of variation in bond yields. However, their influence is very sensitive to the specification model. Variance decompositions show that macro factors explain a significant share of the movements at the short and middle segments of the yield curve (up to 50 percent), while unobservable factors are the main drivers for most of the movements at the long end of the yield curve (up to 80 percent). Furthermore, the authors find that international markets are relevant for the determination of the risk premium in the short term. Higher uncertainty in international markets increases bond yields, although this effect vanishes quickly. Finally, the authors find that no-arbitrage restrictions with the incorporation of macro factors improve forecasts. Originality/value: To the authors’ knowledge this is the first application of this type of models using data from an emerging country such as Peru.

Item Type: Article
Additional Information: © 2019 Emerald Publishing Limited Export Date: 8 August 2019
Divisions: Economics
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
JEL classification: C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors > C32 - Time-Series Models
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates
E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects)
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
Date Deposited: 14 Aug 2019 23:17
Last Modified: 11 Nov 2019 00:17
URI: http://eprints.lse.ac.uk/id/eprint/101362

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