The Macro-finance Model of the Czech Economy
| Thesis title in Czech: | Makrofinanční model české ekonomiky |
|---|---|
| Thesis title in English: | The Macro-finance Model of the Czech Economy |
| Academic year of topic announcement: | 2013/2014 |
| Thesis type: | diploma thesis |
| Thesis language: | angličtina |
| Department: | Institute of Economic Studies (23-IES) |
| Supervisor: | PhDr. Jaromír Baxa, Ph.D. |
| Author: | hidden - assigned by the advisor |
| Date of registration: | 16.06.2014 |
| Date of assignment: | 16.06.2014 |
| Date and time of defence: | 08.02.2017 00:00 |
| Venue of defence: | IES |
| Date of electronic submission: | 04.01.2017 |
| Date of proceeded defence: | 08.02.2017 |
| Opponents: | doc. Ing. Tomáš Cahlík, CSc. |
| URKUND check: | |
| Guidelines |
| The first step is the collection of data. I will use data on Czech swap rates and broad spectrum of macroeconomic variables. I will also include data on central banks’ balance sheet size, financial stress indices and other indicators reflecting unconventional monetary policy.
Secondly, I will build the dynamic Nelson-Siegel model and assess its ability to predict yield curve movements based on mean square error metrics. The broad set of macroeconomic variables will be considered and tested as relevant explanatory variables. The next step is the introduction of the regime-switching model into the dynamic Nelson Siegel model and its application to the Czech economic situation. I will follow approach suggested in Christensen (2015). Finally, models will be compared based on several metrics such as Bayesian information criterion or mean square errors. I will use R software environment for modelling. |
| References |
| 1) Diebold, F. X., G. D. Rudebusch, & B. Aruoba (2006): "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach. " Journal of Econometrics 131:pp. 309-338.
2) Nelson, C. R., & A. F. Siegel (1987): "Parsimonious Modeling of Yield Curves." Journal of Business 60: pp. 473-489. |
| Preliminary scope of work |
| The yield curve is one of the key statistics that economics and investors use to try to estimate future course of the economy. The shape of the yield curve helps to predict the future state of the economic activity and the future interest rate change. The yield curve has an impact on financing costs and therefore investment decisions of businesses across all markets. For example, yield curve dynamics are important factors determining banks’ policy on investment and liquidity management. Banks hold clients deposit and provide loans, however the gap between these two entries are invested to protect them from the loss of value. The investment portfolio amounts approximately 25% of balance sheet in a general retail bank. This amount can reach 200 billion crowns in the largest Czech retail banks.
These facts highlight the importance of yield curves forecasting and understanding its macroeconomic determinants. Moreover the current state of the economy is determined by a broad spectrum of unconditional monetary policy tools and unprecedented economic turnovers which make even more difficult to predict and understand to yield curves’ movements. This thesis aims to determine how the Czech yield curves responded to the main economic events in the recent past and to what extent we can predict their future path. The Nelson-Siegel model (Nelson&Siegel, 1987) provides simple and comprehensive framework for yield curve modelling. Diebold&Li (2006) introduce the dynamic Nelson-Siegel model with three time varying factors – level, slope and curvature. These factors are key determinants of yield curve. This thesis will assess to what extent the main economic events had an impact on the three time varying factors and how precisely the three factor model can forecast yield curves. |
| Preliminary scope of work in English |
| The yield curve is one of the key statistics that economics and investors use to try to estimate future course of the economy. The shape of the yield curve helps to predict the future state of the economic activity and the future interest rate change. The yield curve has an impact on financing costs and therefore investment decisions of businesses across all markets. For example, yield curve dynamics are important factors determining banks’ policy on investment and liquidity management. Banks hold clients deposit and provide loans, however the gap between these two entries are invested to protect them from the loss of value. The investment portfolio amounts approximately 25% of balance sheet in a general retail bank. This amount can reach 200 billion crowns in the largest Czech retail banks.
These facts highlight the importance of yield curves forecasting and understanding its macroeconomic determinants. Moreover the current state of the economy is determined by a broad spectrum of unconditional monetary policy tools and unprecedented economic turnovers which make even more difficult to predict and understand to yield curves’ movements. This thesis aims to determine how the Czech yield curves responded to the main economic events in the recent past and to what extent we can predict their future path. The Nelson-Siegel model (Nelson&Siegel, 1987) provides simple and comprehensive framework for yield curve modelling. Diebold&Li (2006) introduce the dynamic Nelson-Siegel model with three time varying factors – level, slope and curvature. These factors are key determinants of yield curve. This thesis will assess to what extent the main economic events had an impact on the three time varying factors and how precisely the three factor model can forecast yield curves. |