Interest Rate Term Structure in Latvia in the Monetary Policy Context

3/2003

Abstract
This paper examines applicability of various models of the yield curve construction to the Latvian money and government securities markets, and analyses the information content implied in the yield curve. Rejection of the hypothesis about the existence of a zero risk premium leads to an inference that forward rates in general do not ensure unbiased forecasts of spot rates, and the pure interest rate expectations theory cannot be applied in interest rate forecasting. Long-term interest rates contain a risk premium that is other than zero. This conforms well to the results obtained from the studies conducted on the financial markets of developed countries.

Key words: term structure of interest rates, risk premium, the Nelson-Siegel model

JEL classification codes: D84, E43, E47, G10