Evaluating the Existence of Structural Change in the Brazilian Term Structure of Interest : Evidence Based on Cointegration Models with Structural Break

This paper investigates whether there is evidence of structural change in the Brazilian term structure of interest rates. Multivariate cointegration techniques are used to verify this evidence. Two econometrics models are estimated. The first one is a Vector Autoregressive Model with Error Correction Mechanism (VECM) with smooth transition in the deterministic coefficients (Ripatti and Saikkonen). The second one is a VECM with abrupt structural change formulated by Hansen. Two datasets were analysed. The first one contains a nominal interest rate with maturity up to three years. The second data set focuses on maturity up to one year. The first data set focuses on a sample period from 1995 to 2010 and the second from 1998 to 2010. The frequency is monthly. The estimated models suggest the existence of structural change in the Brazilian term structure. It was possible to document the existence of multiple regimes using both techniques for both databases. The risk premium for different spreads varied considerably during the earliest period of both samples and seemed to converge to stable and lower values at the end of the sample period. Long-term risk premiums seemed to converge to international standards, although the Brazilian term structure is still subject to liquidity problems for longer maturities