Practical exercise II Alejandro Bernales Finance I Practical exercise II Alejandro Bernales Universidad de Chile Universidad de Chile Practical exercise II Alejandro Bernales Question 1: Term Structure of Interest Rates 1. Go Bank of England website (https://www.bankofengland.co.uk/statistics/yield-curves) and take the series: Monthly government liability curve (nominal)-SPOT CURVE (for different maturities: 6 month to 40 years). Assume that rates has the term convention Trading days/Trading days. 2. Fit the Nelson-Siegel model to find the term structure of interest rates. Please, as explained in class, be careful to find a global optimal parameters. – Fit the Nelson-Siegel model for the last TRADING DAY for 2016,2017, 2018, 2019 and 2020. • You will have 5 curve 3. Estimate the out-of-sample error from fitting the term structure with the Nelson-Siegel model for each month. To this end, take the following steps: a) Remove one rate from your data. b) Fit the Nelson-Siegel model to find the term structure. c) Find the difference (in absolute value) between the removed rate in part (a) and the model output for it from part (b). d) Repeat a, b and c with every rate available for both models. e) Average the absolute value differences and report their values f) Discuss the error estimates relative to the interest rate levels. 4. This is the most important point (60% of the score in this question): Discuss the evolution of the term-structure interest rate in England, over each month. Explain this evolution according to news, economic, social an political events in England and in the global economy. Universidad de Chile Practical exercise II Alejandro Bernales How do you have to delivery the practical exercises ? 1) In groups of TWO students 2) Please, provide: • A report. • Electronic files. which were used to calculate everything (including explanations): Matlab, R, Excel files, or any code in any software or language that you will use to calculate this homework. Deadline: July 18th, 2021. Important A: I will not move the deadline. So please organize your time to have everything by then. Universidad de Chile
