A No-Arbitrage Structural Vector Autoregressive Model of the UK Yield Curve


  • This article is based on the author's PhD dissertation at Bocconi University. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management. The author wishes to thank Jonathan Temple and anonymous referees for very helpful comments. The author also thanks Carlo Favero, Matthew Hurd, Mike Joyce, Peter Lildholdt, LinLin Niu, Monika Piazzesi, Ulf Soderstrom and Peter Westaway for their valuable suggestions and kind support. All remaining errors are that of the author.


This article combines a Structural Vector Autoregression with a no-arbitrage approach to build a multifactor Affine Term Structure Model (ATSM). The resulting No-Arbitrage Structural Vector Autoregressive (NASVAR) model implies that expected excess returns are driven by structural macroeconomic shocks. This is in contrast with a standard ATSM, in which agents are concerned with non-structural risks. As a simple application, we study the effects of supply, demand and monetary policy shocks on the UK yield curve. We show that all structural shocks affect the slope of the yield curve, with demand and supply shocks accounting for a large part of the time variation in bond yields.