EFFICIENT INTEREST RATE CURVE ESTIMATION AND FORECASTING IN BRAZIL

Abstract: Modeling the term structure of interest rate is very important to macroeconomists and financial market practitioners in general. In this paper, we used the Diebold-Li approach of the Nelson Siegel model in order to adjust and forecast the Brazilian yield curve. The data consisted of daily observations of future ID yields traded in the BM&F which presented more liquidity from January 2006 to February 2009. Differently from the literature on the Brazilian yield curve, where the Diebold-Li model is estimated through the two-step method, the model herein is put in the state-space form, and the parameters are simultaneously and efficiently estimated using the Kalman filter. The results obtained for the adjustment, but mainly for the forecast, showed that the Kalman filter is the most suitable method for the estimation of the model, generating better forecast for all maturities when we consider the forecasting horizons of one, three and six months