Exploration of the Brazilian Term Structure in a Hidden Markov Framework
January 1, 2011
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Summary
We apply a hidden Markov model of the term structure to modeling the Brazilian swap rate curve. We examine the model's characteristics and its performance in describing the cross-sectional and time-series dynamics of the term structure. Two regimes are identified, a high level and a high volatility regime and a low level and low volatility regime. Both regimes are persistent and are explained by the level and the slope of the term structure. The model is estimated using a Bayesian MCM algorithm that produces consistent standard errors and a reliable method for testing the differences between the model parameters.
Subject: Econometric analysis, Financial regulation and supervision, Financial services, Inflation, Market risk, Markov-switching models, Prices, Time series analysis, Yield curve
Keywords: affine regime, ATSM, Brazil, Hidden Markov Models, Inflation, market price, Market risk, Markov chain, Markov-switching models, MCMC, mean reversion, State process, state transition, Term Structure, time series, Time series analysis, volatility regime, WP, Yield curve
Pages:
31
Volume:
2011
DOI:
Issue:
022
Series:
Working Paper No. 2011/022
Stock No:
WPIEA2011022
ISBN:
9781455211937
ISSN:
1018-5941
