Portuguese Yeld Curve: Volatility and Correlations.- J. C. Rodrigues da Costa

Abstract

Stronger competition in Europe triggered by the launch of the Euro and increasing regulatory demands upon the capitalisation of banks and other financial intermediaries in the continent have raised the importance of a sound and accurate measurement of the risks  brought to them by the positions they take in different assets. In Portugal banks still invest predominantly in debt instruments due to the small size of the domestic equity market, and this makes their profitability and solvency more sensitive to interest rate volatility than to the uncertainty of equity indices. But some VaR models require statistic information about the form of the local yield curve as well as how it tends to evolve along the time. However, it is important to note that there are reasons to believe that a common currency within the EU does not eliminate differences at this level between, on one hand, small and peripheral countries and, on the other hand, central and larger ones. This paper makes a first approach into this direction suggesting models to estimate the Portuguese yield curve, the spreads against German spot rates, and some values of volatility and correlation for our domestic interest rates.