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An Affine Factor Model of the Greek Term Structure

Hiona Balfoussia

No 72, Working Papers from Bank of Greece

Abstract: This paper aims to contribute to our understanding of the dynamics driving the Greek term structure of nominal interest rates and to explore their possible macro- economic determinants. A canonical, Vasicek-type latent affine factor model of the Greek term structure is estimated on data spanning the period March 1999 to February 2007. This framework allows us to directly examine the impact of the extracted factors on the shape of the yield curve over time and on the associated price and amount of risk in the term structure. In line with the related literature, three latent factors, i.e. a "level" factor, a "slope" factor and a "curvature" factor, appear to capture most of the time variation in the Greek nominal term structure of interest rates and to drive its dynamics. The evolution of these factors over time is examined on the basis of business cycle theory and related to macroeconomic fundamentals of the Greek economy.

Keywords: Term structure; Affine factors; Stochastic discount factor; Kalman filter (search for similar items in EconPapers)
JEL-codes: E43 E44 G1 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2008-05
New Economics Papers: this item is included in nep-mac
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