Long-term sovereign interest rates in Czechia, Hungary and Poland: a comparative assessment with an affine term structure model

Jakub Janus

doi:10.21307/stattrans-2022-009

Long-term sovereign interest rates in Czechia, Hungary and Poland: a comparative assessment with an affine term structure model

Jakub Janus Cracow University of Economics. Department of Macroeconomics, Poland. ORCID:https://orcid.org/0000-0002-2131-6077 Statistics in Transition new series, vol. 23, 2022, 1, pages: 153–171 Published online: 15 March 2022 DOI 10.21307/stattrans-2022-009 Citation: Janus J., (2022). Long-term sovereign interest rates in Czechia, Hungary and Poland: a comparative assessment with an affine term structure model, Statistics in Transition new series, 23(1), pp. 153–171. https://doi.org/10.21307/stattrans-2022-009

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ABSTRACT

This paper provides a comparative evaluation of the behaviour of long-term sovereign yields in Czechia, Hungary and Poland from 2001 to 2019. An affine term structure model developed by Adrian, Crump and Moench (2013) is used as an empirical framework for the decomposition of the bond yields into term premium and risk-neutral components. We document a substantial compression in term premia which started in Central European economies around 2013 and played a decisive role in the changes that occurred in 10-year sovereign yields. This pattern, however, was more prevalent in Czechia and Poland than in Hungary. We show that long-term rates in all three economies remained higher than in Germany due to relatively large risk-neutral components. Nevertheless, cross-country correlations became increasingly dependent on term premium dynamics, both among Central European economies and between each of them and Germany. These results are robust to bias-correction in the baseline models and interpreted in the light of the general interest rates decline in the global economy. Potential policy implications are also discussed.

KEYWORDS

long-term interest rates, affine term structure model, term premium, risk-neutral rates, Central Europe.

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