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Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction
Using a Principal Component Analysis (PCA) approach, we investigate the sovereign yield spread term structure of the BRICS economies against the U.S. We show that the term structure for these markets are primarily driven by three latent factors which can be classified as the spread level, slope and...
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| Format: | Thesis |
| Language: | English |
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Department of Finance and Tax
2019
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| _version_ | 1867613215175737344 |
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| access_status_str | Open Access |
| author | Reddy, Desigan |
| author2 | Huang, Chun-Sung |
| author_browse | Huang, Chun-Sung Reddy, Desigan |
| author_facet | Huang, Chun-Sung Reddy, Desigan |
| author_sort | Reddy, Desigan |
| collection | Thesis |
| description | Using a Principal Component Analysis (PCA) approach, we investigate the sovereign yield spread term structure of the BRICS economies against the U.S. We show that the term structure for these markets are primarily driven by three latent factors which can be classified as the spread level, slope and curvature factors. We further postulate that a country’s yield curve contains valuable information about its future economic state and as such the PCA derived spread factors, which are based on the differences between sovereign yield curves, encapsulates material macro-economic information between the countries. In light of this, we show that augmenting the traditional Uncovered Interest Rate Parity model (UIRP) with these factors improves the models predictive accuracy of exchange rate movements. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/29691 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:32:36.207Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2019 |
| publishDateRange | 2019 |
| publishDateSort | 2019 |
| publisher | Department of Finance and Tax |
| publisherStr | Department of Finance and Tax |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/29691 Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction Reddy, Desigan Huang, Chun-Sung Financial and Risk Management Using a Principal Component Analysis (PCA) approach, we investigate the sovereign yield spread term structure of the BRICS economies against the U.S. We show that the term structure for these markets are primarily driven by three latent factors which can be classified as the spread level, slope and curvature factors. We further postulate that a country’s yield curve contains valuable information about its future economic state and as such the PCA derived spread factors, which are based on the differences between sovereign yield curves, encapsulates material macro-economic information between the countries. In light of this, we show that augmenting the traditional Uncovered Interest Rate Parity model (UIRP) with these factors improves the models predictive accuracy of exchange rate movements. 2019-02-19T13:44:06Z 2019-02-19T13:44:06Z 2018 2019-02-19T10:31:19Z Master Thesis Masters MCom http://hdl.handle.net/11427/29691 eng application/pdf Department of Finance and Tax Faculty of Commerce University of Cape Town |
| spellingShingle | Financial and Risk Management Reddy, Desigan Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction |
| thesis_degree_str | Master's |
| title | Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction |
| title_full | Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction |
| title_fullStr | Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction |
| title_full_unstemmed | Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction |
| title_short | Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction |
| title_sort | factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction |
| topic | Financial and Risk Management |
| url | http://hdl.handle.net/11427/29691 |
| work_keys_str_mv | AT reddydesigan factorsofthetermstructureofsovereignyieldspreadsandtheeffectontheuncoveredinterestrateparitymodelforexchangerateprediction |