Factors of the term structure of sovereign yield spreads and the effect on the uncovered interest rate parity model for exchange rate prediction
Journal: Open University of Cape Town (University of Cape Town)
Year: 2018

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 di