Decomposition of the nominal and real yield curve, term premium dynamics, and inflation forecast in Brazil

Decomposition of the nominal and real yield curve, term premium dynamics, and inflation forecast in Brazil

• Author
• Werley da Costa Cordeiro
• Co-authors
• João Frois Caldeira
• Abstract

• In this paper, we use the dynamic and arbitrage-free affine models for the term structure of
  interest rates AFTSM0s to model nominal and real interest rates jointly. The approach allows
  decomposing interest rates into expectations for future interest rates and the risk premium investors
  compensate for buying long-term bonds. In addition, we analyze its ability to capture risk-adjusted
  inflation expectations using it for inflation forecasting. The results suggest that the real and nominal
  term premiums are time-varying and increase along maturities. Also, the risk-adjusted inflation
  expectations outperform the FOCUS survey in long forecasting horizons.

• Keywords
• Yield curve, inflation risk premium, affine term-structure model, expected inflation, Break-even inflation rate.
• Subject Area
• Econometrics and Numerical Methods

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