A No-Arbitrage Structural Vector Autoregressive Model of the UK Yield Curve

33 Pages Posted: 22 Dec 2008  

Iryna Kaminska

Bank of England

Date Written: December 22, 2008

Abstract

This paper combines a structural vector autoregression (SVAR) with a no-arbitrage approach to build a multifactor affine term structure model (ATSM). The resulting no-arbitrage structural vector autoregressive (NA-SVAR) model implies that expected excess returns are driven by the structural macroeconomic shocks. This is in contrast to a standard ATSM, in which agents are concerned with non-structural risks. As a simple application of a NA-SVAR model, we study the effects of supply, demand and monetary policy shocks on the UK yield curve. We show that all shocks affect the slope of the yield curve, with demand and supply shocks accounting for a large part of the time variation in bond yields. The short end of the yield curve is driven mainly by the expectations component, while the term premium matters for the dynamics of the long end of the yield curve.

Keywords: Structural vector autoregression, interest rate risk, essentially affine term structure model

JEL Classification: C32, E43, E44

Suggested Citation

Kaminska, Iryna, A No-Arbitrage Structural Vector Autoregressive Model of the UK Yield Curve (December 22, 2008). Bank of England Working Paper No. 357. Available at SSRN: https://ssrn.com/abstract=1319280 or http://dx.doi.org/10.2139/ssrn.1319280

Iryna Kaminska (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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