The fitting of the German yield curve: a dynamic approach using latent, macroeconomic and stock market variables

• Author(s): Almeida, José Pedro Abreu
• Date: 2010
• Persistent ID: http://hdl.handle.net/10362/10351
• Origin: Repositório Institucional da UNL
• Subject(s): Yield curve; State-space model; Macroeconomy; Stock market
• Document Type: Master thesis
• Language: English
• Advisor(s): Leiria, Paulo
• Contributor(s): RUN

Description

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA – School of Business and Economics

The purpose of this Work Project is to build a yield curve model for the German Government yield curve containing latent variables (Level, Slope and Curvature), macroeconomic variables (German IFO and Inflation Rate) and a stock market variable (German Stock Index DAX), while studying the yield curve dynamics. The model incorporates the Nelson and Siegel (1987) factor model under a State-Space framework and the estimation results provided a good fitting of the historical yield curve. Additionally, after doing a Variance Decomposition analysis, this project proves the existence of an interaction between the yield curve and the German Macroeconomy/Stock Market.