Deriving an Empirical Model of the Canadian zerocoupon yield curves Tsun Yan Chan Major Paper

Abstract

This paper aims to derive an empirical model of the Canadian zero-coupon yield curve using a five-step linear regression method. By emulating from Adrian, Crump and Moench’s (2013) model, I am able to fit the model-implied yields to the observable data on the zero-coupon yield curve. The zero-coupon yield curve dataset is constructed by the Bank of Canada and the sample period is January 1987 to December 2011. There are a total of T = 300 monthly observations and a cross section of N = 12 maturities. First, I compute the principal components of the observable yields and use the first five as state variables. Then, I compute the parameters and derive the model-implied zero-coupon yields. The results show that my model fits well, with very small errors especially for maturities of less than 5 years. I have also estimated the model-implied term premiums.