Prague Economic Papers 2011, 20(2):140-156 | DOI: 10.18267/j.pep.393

Yield Curve Dynamics: Regional Common Factor Model

Boril Šopov1, Jakub Seidler2
1 Institute of Economic Studies, Charles University in Prague (boril.sopov@gmail.com).
2 Czech National Bank and Institute of Economic Studies, Charles University in Prague (seidler@email.cz).

In this paper, we focus on thorough yield curve modelling. We build on extended classical NelsonSiegel model, which we further develop to accommodate unobserved regional common factors. We centre our discussion on Central European currencies' yield curves: CZK, HUF, PLN and SKK. We propose a model to capture regional dynamics purely based on state space formulation. The contribution of this paper is twofold: we examine regional yield curve dynamics and we quantify regional interdependencies amongst considered currencies' yield curves. We conclude that the CZK yield curve possesses its own dynamics corresponding to country specific features, whereas other currencies' yield curves are strongly influenced by the regional level, the regional slope factor or both.

Keywords: Kalman filter, dynamic factor model, Nelson-Siegel, state space, regional yield curve, principal component analysis
JEL classification: C51, C53, G17

Published: January 1, 2011  Show citation

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Šopov, B., & Seidler, J. (2011). Yield Curve Dynamics: Regional Common Factor Model. Prague Economic Papers, 20(2), 140-156. doi: 10.18267/j.pep.393
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