Market Risk in Russia: Effects of Macro-Parameters on Movements of Yield Curve

This paper studies the effect of market macro variables on the zero-coupon yield curve of Russian federal government bonds. The model describing the zero-coupon yield curve was chosen as the Nelson Siegel model, which is characterized by beta parameters, which can be interpreted as a shift, slope and change in the curvature of the simulated curve. This paper describes an attempt to use the Nelson Siegel model to predict the future shape of the zero-coupon yield curve based on the data for 2010–2019, given in monthly frequency. The central questions posed in this paper are: how the introduction of macroparameters into a model appears on different parts of the curve and whether the introduction of macroparameters into the model will lead to a significant improvement in the predictive power and goodness of fit of the model's applications. The result of the study confirms the improvement of the predictive strength of the model on the forecast horizon. Also, a significant influence of macro variables (mostly monetary variables) on the shape of the zero-coupon yield curve in the short, medium and long repayment duration has been observed. The results of this work can be used both in updating the tools for estimating the fair value of fixed income instruments, as well as for derivatives, in the Russian financial market. Additionally, the results of this study may be applied in the management of financial (market) risk, since the estimated coefficients of the regression model allow to model the effect of negative market scenarios on the value of a portfolio.