Functional data analysis for brazilian term structure of interest rate

Lucélia Vaz and Rodrigo Raad
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Lucélia Vaz: Federal Center for Technological Education of Minas Gerais
Rodrigo Raad: Federal University of Minas Gerais

No 638, Textos para Discussão Cedeplar-UFMG from Cedeplar, Universidade Federal de Minas Gerais

Abstract: This paper analyzes the Brazilian nominal yield curves based on a Functional Data Anal- ysis framework. Specifically, we use functional principal component analysis to describe sources of variability of the yield curves and their related level, slope, and curvature. Addi- tionally, we present a functional linear regression model to investigate the macroeconomic determinants of the yield curves. We conclude that the level shocks strongly explain the source of variability in the interest rate curves. Moreover, the slope changes correspond to the second-largest source of variability. It is negatively affected by the nominal exchange rate and Selic reference rate and positively by Brazil’s risk and industrial capacity utilization. We also infer that the following explanatory variables expected inflation, Selic reference rate, Brazil risk, and industrial capacity utilization, have positive effects on the level of the yield curves. The variables Selic, Brazil risk, and the nominal exchange rate positively impact cur- vature. Furthermore, it is negatively impacted by industrial capacity utilization and expected inflation.

Keywords: Functional data analysis; functional principal component analysis; term structure of interest rate. (search for similar items in EconPapers)
JEL-codes: G1 G12 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2021-12
New Economics Papers: this item is included in nep-mon
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