An empirical analysis of the Mexican term structure of interest rates and some evidence for other Latin American countries
The term structure of interest rates is an important economic and financial tool that provides information about the future behavior of critical economic and financial variables. In this study, I examine the behavior of interest rates and the term structure of interest rates in Mexico and other Latin American countries. The first chapter examines whether Mexican interest rates are non-stationary and develops a statistical description of the behavior of interest rates. This chapter also examines the influence of financial and economic factors to explain the behavior of Mexican interest rates and determines the role of political and social events and institutional changes. I find that Mexican interest rates are nonstationary and that the random walk process is not the best representation for estimating and forecasting short-term interest rates. The existence of the nonstationarity characteristic establish the need of use interest rate differences instead of interest rate levels to obtain correct inferences. In the second chapter, I apply recently developed methodologies to test whether the Mexican term structure incorporates information about the behavior of short-term interest rates, future inflation, real interest rates, and term premia. Additionally, I test the expectations hypothesis in the short run and in the long run. Results show scant evidence in favor of the expectations hypothesis in the short run, but evidence in the long run. The tests of the expectations hypothesis, however, reveal that the shorter part of the (i.e. less than six months) Mexican term structure provides information regarding real interest rates and future inflation rates. With respect to the term premia, the results suggest that risk premium varies over time and that the risk premium measurements are stationary. This suggests that Mexican interest rates are mean reverting. In the third chapter, I study the stochastic behavior of the short-term structure for six Latin American countries, Argentina, Brazil, Columbia, Chile, Mexico, and Venezuela. I estimate eight term structure models using the methodology developed by Chan, Karolyi, Longstaff and Sanders (1992) and empirically compare the models to determine which model best captures the stochastic behavior of interest rates for the six Latin American countries. The results show that no single model can satisfactorily describe the stochastic behavior for all six countries. However, the Brennan and Schwartz model is the model that best describes the stochastic behavior for the countries with high elasticity of variance: Argentina, Brazil, Chile and Mexico.