A term structure model under cyclical fluctuations in interest rates

• Manuel Moreno ^[1] ; Alfonso Novales ^[2] ; Federico Platania ^[3]
  1. [1] Universidad de Castilla-La Mancha

     Universidad de Castilla-La Mancha

     Ciudad Real, España

     
  2. [2] Universidad Complutense de Madrid

     Universidad Complutense de Madrid

     Madrid, España

     
  3. [3] Pôle Universitaire Léonard de Vinci

     Pôle Universitaire Léonard de Vinci

     Arrondissement de Nanterre, Francia

     

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• Localización: Documentos de Trabajo (ICAE), ISSN-e 2341-2356, Nº. 31, 2019, págs. 1-33
• Idioma: inglés
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• Resumen

  • 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 relationship 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 modeling approach also provides a characterization of long-term fluctuations in the mean level of interest rates unveiling the effects of monetary policy interventions 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.