A term structure model under cyclical fluctuations in interest rates

Manuel Moreno, Alfonso Novales and Federico Platania
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Federico Platania: Léonard de Vinci Pôle Universitaire, Paris La Défense, France.

No 2019-31, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: We propose a flexible yet tractable model of the term structure of interest rates (TSIR). Term structure models attempt to explain how interest rates depend on their maturities at a given point in time, characterizing the rela- tionship between short-term and long-term rates. Our model can reproduce and fit a variety of TSIR shapes by capturing cyclical fluctuations of interest rates, different monetary policy reactions as witnessed pre- and post-crisis as well as the effect of the business cycle or exogenous shocks. Our modelling approach also provides a characterization of long-term fluctuations in the mean level of interest rates unveiling the effects of monetary policy in- terventions in interest rates. Furthermore, using daily US data, we compare the empirical ability of our model to both fit and forecast the TSIR under different economic scenarios. We show that our model improves pricing and risk management by fitting and predicting interest rates more accurately and precisely than do existing TSIR models.

Keywords: Term structure of interest rates; cyclical fluctuations; bond pricing; TSIR fitting performance, interest rates forecast. (search for similar items in EconPapers)
JEL-codes: C31 C58 D53 E32 E43 G13 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2019-09
New Economics Papers: this item is included in nep-for and nep-mac
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Journal Article: A term structure model under cyclical fluctuations in interest rates (2018)
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