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The talkative variables of the hybrid Heston model: Yields’ maturity and economic (in)stability

Author

Listed:
  • Francesco Campigli

    (Scuola Normale Superiore, Pisa, Italy)

  • Gabriele Tedeschi

    (Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Maria Cristina Recchioni

    (Department of Economics and Social Sciences, U. Politecnica Delle Marche, Ancona, Italy)

Abstract

This paper aims to shed light on the bidirectional relationship between the yield curve and the macroeconomic dynamics. By calibrating the hybrid Heston model proposed by Recchioni and Tedeschi (2017) on the Greek, Portuguese and German government bond yields with different maturities, we show that the values of the estimated parameters contain different information on the economic conditions of the investigated area. Firstly, the estimated parameters reflect the opinion of the financial markets on the credibility of the monetary policies adopted to face crises and, in particular, their effectiveness in the short, medium and long term. Secondly, they are useful in anticipating the phases of instability characterizing the selected countries. Finally, these parameters, although obtained just estimating the model on the yield time series, are directly related to the macroeconomic performances of the zone. Overall, our results reassign a role to the financial variables in macroeconomic models.

Suggested Citation

  • Francesco Campigli & Gabriele Tedeschi & Maria Cristina Recchioni, 2021. "The talkative variables of the hybrid Heston model: Yields’ maturity and economic (in)stability," Working Papers 2021/03, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2021/03
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    More about this item

    Keywords

    Stochastic volatility model; Yield dynamics and macroeconomic performances in the Eurozone; Early warning indicator;
    All these keywords.

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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