Efficient Yield Curve Estimation and Forecasting in Brazil
Revista Economia, January/April 2010
25 Pages Posted: 21 Jun 2012
Date Written: 2010
Modeling the term structure of interest rate is very important to macroeconomists and financial market practitioners in general. In this paper, we used the Diebold-Li interpretation to the Nelson Siegel model in order to fit and forecast the Brazilian yield curve. The data consisted of daily observations of the most liquid future ID yields traded in the BM&F from January 2006 to February 2009. Differently from the literature on the Brazilian yield curve, where the Diebold-Li model is estimated through the two-step method, the model herein is put in the state-space form, and the parameters are simultaneously and efficiently estimated using the Kalman filter. The results obtained for the fit and for the forecast showed that the Kalman filter is the most suitable method for the estimation of the model, generating better forecast for all maturities when we consider the forecasting horizons of one and three months.
Keywords: Term Structure of the Interest Rate, Yield Curve, State-Space Model, Kalman Filter
JEL Classification: C53, E43, G17
Suggested Citation: Suggested Citation