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Estimation of Peru’s sovereign yield curve: the role of macroeconomic and latent factors

Alejandra Olivares Rios (Department of Economics, Pontificia Universidad Católica del Perú, Lima, Peru) (Department of Economics, London School of Economics and Political Science, London, UK)
Gabriel Rodríguez (Department of Economics, Pontificia Universidad Católica del Perú, Lima, Peru)
Miguel Ataurima Arellano (Department of Economics, Pontificia Universidad Católica del Perú, Lima, Peru)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 2 August 2019




Following Ang and Piazzesi’s (2003) study, the authors use an affine term structure model to study the relevance of macroeconomic (domestic and foreign) factors for Peru’s sovereign yield curve in the period from November 2005 to December 2015. The paper aims to discuss this issue.


Risk premia are modeled as time-varying and depend on both observable and unobservable factors; and the authors estimate a vector autoregressive model considering no-arbitrage assumptions.


The authors find evidence that macro factors help to improve the fit of the model and explain a substantial amount of variation in bond yields. However, their influence is very sensitive to the specification model. Variance decompositions show that macro factors explain a significant share of the movements at the short and middle segments of the yield curve (up to 50 percent), while unobservable factors are the main drivers for most of the movements at the long end of the yield curve (up to 80 percent). Furthermore, the authors find that international markets are relevant for the determination of the risk premium in the short term. Higher uncertainty in international markets increases bond yields, although this effect vanishes quickly. Finally, the authors find that no-arbitrage restrictions with the incorporation of macro factors improve forecasts.


To the authors’ knowledge this is the first application of this type of models using data from an emerging country such as Peru.



This paper draws from Alejandra Olivares’s thesis for her Master’s degree at the Graduate School of Economics of the Pontificia Universidad Católica del Perú (PUCP). The authors are grateful for the valuable comments provided by Javier Nagamine (Peru’s Superintendence of Banking and Insurance Companies, SBS), Jorge Rojas (PUCP) and Paul Castillo (Central Reserve Bank of Peru, BCRP and PUCP), participants at the 34th BCRP Meeting of Economists (Lima-Peru, October 25–26, 2016), the LXV Course in Advanced Economics, and the 11th BCRP Course in Advanced Finance (Lima-Peru, January 26, 2018). The authors also thank the helpful comments from an anonymous referee, as well as Professor Mohsen Bahmani-Oskooee’s help to improve and focus the paper. All remaining errors are the authors’ responsibility.


Olivares Rios, A., Rodríguez, G. and Ataurima Arellano, M. (2019), "Estimation of Peru’s sovereign yield curve: the role of macroeconomic and latent factors", Journal of Economic Studies, Vol. 46 No. 3, pp. 533-563.



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