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A term structure model under cyclical fluctuations in interest rates

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Moreno, Manuel and Novales Cinca, Alfonso and Platania, Federico (2019) A term structure model under cyclical fluctuations in interest rates. [ Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 31, 2019, ISSN: 2341-2356 ]

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Abstract

We propose a flexible yet tractable model of the term structure of interest rates (TSIR). Term structure models attempt to explain how interest rates depend on their maturities at a given point in time, characterizing the rela- tionship between short-term and long-term rates. Our model can reproduce and fit a variety of TSIR shapes by capturing cyclical fluctuations of interest rates, different monetary policy reactions as witnessed pre- and post-crisis as well as the effect of the business cycle or exogenous shocks. Our modelling approach also provides a characterization of long-term fluctuations in the mean level of interest rates unveiling the effects of monetary policy in- terventions in interest rates. Furthermore, using daily US data, we compare the empirical ability of our model to both fit and forecast the TSIR under different economic scenarios. We show that our model improves pricing and risk management by fitting and predicting interest rates more accurately and precisely than do existing TSIR models.


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Term structure of interest rates; cyclical fluctuations; bond pricing; TSIR fitting performance, interest rates forecast.
Subjects:Social sciences > Economics > Money
Social sciences > Economics > Econometrics
Social sciences > Economics > Stock exchanges
JEL:D53, E43, G13, C58, E32, C31
Series Name:Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2019
Number:31
ID Code:57381
Deposited On:17 Oct 2019 08:45
Last Modified:17 Oct 2019 08:45

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