The talkative variables of the hybrid Heston model: Yields’ maturity and economic (in)stability

Francesco Campigli (), Gabriele Tedeschi and Maria Cristina Recchioni ()
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Francesco Campigli: Scuola Normale Superiore, Pisa, Italy
Maria Cristina Recchioni: Department of Economics and Social Sciences, U. Politecnica Delle Marche, Ancona, Italy

No 2021/03, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: This paper aims to shed light on the bidirectional relationship between the yield curve and the macroeconomic dynamics. By calibrating the hybrid Heston model proposed by Recchioni and Tedeschi (2017) on the Greek, Portuguese and German government bond yields with different maturities, we show that the values of the estimated parameters contain different information on the economic conditions of the investigated area. Firstly, the estimated parameters reflect the opinion of the financial markets on the credibility of the monetary policies adopted to face crises and, in particular, their effectiveness in the short, medium and long term. Secondly, they are useful in anticipating the phases of instability characterizing the selected countries. Finally, these parameters, although obtained just estimating the model on the yield time series, are directly related to the macroeconomic performances of the zone. Overall, our results reassign a role to the financial variables in macroeconomic models.

Keywords: Stochastic volatility model; Yield dynamics and macroeconomic performances in the Eurozone; Early warning indicator (search for similar items in EconPapers)
JEL-codes: C52 C63 G15 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2021
New Economics Papers: this item is included in nep-eec and nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:jau:wpaper:2021/03

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