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Do U.S. factors impact the Brazilian yield curve? Evidence from a dynamic factor model

Filipe Stona () and João F. Caldeira

The North American Journal of Economics and Finance, 2019, vol. 48, issue C, 76-89

Abstract: This paper contributes to the literature on the relationship between the yield curve, macroeconomic variables, and the unexplored interactions with tae U.S. yield curve movements by focusing on an emerging market: Brazil. We incorporate factors for the U.S. yield curve and domestic macroeconomic variables into the Dynamic Nelson Siegel Model to explore comovements with the Brazilian yield curve. As noted here, foreign macroeconomic factors contain a lot of information about the domestic term structure of yields. The empirical results suggest that both American and macroeconomic components may explain the latent factors of the term structure; in particular, the U.S. factors influence the Brazilian yield curve, since almost half of the variance in the level factor was caused by movements in the U.S. curve. Furthermore, we find evidence that a specification with U.S. yield factors is better for short maturities and long forecasts horizons.

Keywords: Yield curve; State-space model; Cross-country comovement; Small open economy; Macro-finance; C58; E43; G12; G15 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:ecofin:v:48:y:2019:i:c:p:76-89