AN AFFINE FACTOR MODEL OF THE GREEK TERM STRUCTURE
Bank of Greece
This paper aims to contribute to our understanding of the dynamics driving the Greek term structure of nominal interest rates and to explore their possible macroeconomic determinants. A canonical, Vasicek-type latent affine factor model of the Greek term structure is estimated on data spanning the period March 1999 to February 2007. This framework allows us to directly examine the impact of the extracted factors on the shape of the yield curve over time and on the associated price and amount of risk in the term structure. In line with the related literature, three latent factors, i.e. a "level" factor, a "slope" factor and a "curvature" factor, appear to capture most of the time variation in the Greek nominal term structure of interest rates and to drive its dynamics. The evolution of these factors over time is examined on the basis of business cycle theory and related to macroeconomic fundamentals of the Greek economy.
Keywords: term structure, affine factors, stochastic discount factor, Kalman filter
JEL classification: E43, E44, G1
Acknowledgements: Valuable discussions with Heather Gibson are gratefully acknowledged. The author has also benefited from comments by Stephen Hall, Daniela Marcelli, Eric Swanson, George Tavlas, Hercules Voridis, the Bank of Greece workshop series participants and the participants of the ECB 2007 Workshop on "The Analysis of money market: role, challenges and implications from the monetary policy perspective". The views expressed in this paper are those of the author and do not necessarily reflect those of the Bank of Greece.
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