Exploration of the Brazilian Term Structure in a Hidden Markov Framework

January 1, 2011

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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:
https://doi.org/10.5089/9781455211937.001
Issue:
022
Series:
Working Paper No. 2011/022
Stock No:
WPIEA2011022
ISBN:
9781455211937
ISSN:
1018-5941

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