A term structure model under cyclical fluctuations in interest rates

  1. Manuel Moreno 1
  2. Alfonso Novales 2
  3. Federico Platania 3
  1. 1 Universidad de Castilla-La Mancha
    info

    Universidad de Castilla-La Mancha

    Ciudad Real, España

    ROR https://ror.org/05r78ng12

  2. 2 Universidad Complutense de Madrid
    info

    Universidad Complutense de Madrid

    Madrid, España

    ROR 02p0gd045

  3. 3 Pôle Universitaire Léonard de Vinci
    info

    Pôle Universitaire Léonard de Vinci

    La Defense, Francia

    ROR https://ror.org/02setav13

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Revista:
Documentos de Trabajo (ICAE)

ISSN: 2341-2356

Año de publicación: 2019

Número: 31

Páginas: 1-33

Tipo: Documento de Trabajo

DIALNET GOOGLE SCHOLAR lock_openDocta Complutense editor

Otras publicaciones en: Documentos de Trabajo (ICAE)

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.

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