Factor Models For The Term Structure Of STIBOR Rates

Abstract: The yield curve of a collection of debt contracts describes the yield of the debt contract as a function of the length-to-maturity of the contract. It turns out that these yield curves provide useful insight about the economy as a whole and can, for example, be used to predict short-term economic downturns. Therefore, it is of utmost importance that financial analysts and decision-makers are able to accurately estimate and model these yield curves. This thesis will utilize a collection of parametric yield curve models, usually called the Nelson-Siegel family. More, specifically we will use a so called two-factor arbitrage-free dynamic Nelson-Siegel model. We will apply this model to data collected from the Swedish central bank, so called Stockholm Interbank Offering Rate (or STIBOR for short). We will also investigate whether including the repo rate, the interest rate set by the Swedish central bank, in the model improves modelling and forecasting capabilities.