Modelling the joint behaviour of interest rates and foreign exchange rates

• Autor(a) principal: Dirks, Thomas Jürgen
• Data de Publicação: 2018
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10400.14/25483
• topic: Domínio/Área Científica::Ciências Sociais::Economia e Gestão

Exposures to interest rate term structures in different currencies and their respective exchange rates are a challenge for risk management. In this paper we address this problem by extending the arbitrage-free Nelson Siegel model, an affine term structure model, to a multi-currency setting integrating exchange rate dynamics to allow forecasting of interest and exchange rates. We review the current state of research in term structure modelling and establish reasoning for using a three-factor model on interbank interest rates. Consequently, we provide the theoretical background for the dynamics of the state variables and the dependence of the exchange rate on the market risk premium. Moreover, to test the model empirically we establish an estimation framework using a Kalman filter. We show empirical results for different extensions of the arbitrage-free Nelson Siegel model. It is apparent that the forecasting performance is highly sensitive to the robustness of the estimation process.