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Functional data analysis for brazilian term structure of interest rate

Author

Listed:
  • Lucélia Vaz

    (Federal Center for Technological Education of Minas Gerais)

  • Rodrigo Raad

    (Federal University of Minas Gerais)

Abstract

This paper analyzes the Brazilian nominal yield curves based on a Functional Data Anal- ysis framework. Specifically, we use functional principal component analysis to describe sources of variability of the yield curves and their related level, slope, and curvature. Addi- tionally, we present a functional linear regression model to investigate the macroeconomic determinants of the yield curves. We conclude that the level shocks strongly explain the source of variability in the interest rate curves. Moreover, the slope changes correspond to the second-largest source of variability. It is negatively affected by the nominal exchange rate and Selic reference rate and positively by Brazil’s risk and industrial capacity utilization. We also infer that the following explanatory variables expected inflation, Selic reference rate, Brazil risk, and industrial capacity utilization, have positive effects on the level of the yield curves. The variables Selic, Brazil risk, and the nominal exchange rate positively impact cur- vature. Furthermore, it is negatively impacted by industrial capacity utilization and expected inflation.

Suggested Citation

  • Lucélia Vaz & Rodrigo Raad, 2021. "Functional data analysis for brazilian term structure of interest rate," Textos para Discussão Cedeplar-UFMG 638, Cedeplar, Universidade Federal de Minas Gerais.
    • Handle: RePEc:cdp:texdis:td638
    as

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    File URL: https://www.cedeplar.ufmg.br/pesquisas/td/TD%20638.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Functional data analysis; functional principal component analysis; term structure of interest rate.;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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