Yield Curve Dynamics - Regional Common Factor Model

In this paper, we focus on thorough yield curve modelling. We build on extended classical Nelson-Siegel model, which we further develop to accommodate unobserved regional common factors. We centre our discussion on Central European currencies´ yield curves: CZK, HUF, PLN and SKK. We propose a model to capture regional dynamics purely based on state space formulation. The contribution of this paper is twofold: we examine regional yield curve dynamics and we quantify regional interdependencies amongst considered currencies´ yield curves. We conclude that the CZK yield curve possesses its own dynamics corresponding to country specific features, whereas other currencies´ yield curves are strongly influenced by the regional level, the regional slope factor or both.