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Exploration of the Brazilian Term Structure in a Hidden Markov Framework
Author:
Mr. Richard Munclinger
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Series:
IMF Working Papers
Volume/Issue:
Volume 2011: Issue 022
Language:
English
Publication Date:
01 Jan 2011
DOI:
https://doi.org/10.5089/9781455211937.001
ISBN:
9781455211937
ISSN:
1018-5941
Pages:
31
Keywords:
WP; market price; time series; Term Structure; Hidden Markov Models; MCMC; ATSM; Brazil; volatility regime; Markov chain; State process; mean reversion; affine regime; state transition; Markov-switching models; Market risk; Yield curve; Time series analysis; Inflation
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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We apply a hidden Markov model of the term structure to modeling the Brazilian swap rate curve. We examine the model's characteristics and its performance in describing the cross-sectional and time-series dynamics of the term structure. Two regimes are identified, a high level and a high volatility regime and a low level and low volatility regime. Both regimes are persistent and are explained by the level and the slope of the term structure. The model is estimated using a Bayesian MCM algorithm that produces consistent standard errors and a reliable method for testing the differences between the model parameters.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2011: Issue 022