Journal of Business & Economic Policy

Curvature Loading on Term Structure of Interest Rate: Indonesia Bond Market Context
Randi Bayu Prathama, Sugiarto, Gracia Shinta S.Ugut, Edison Hulu

Abstract
The term structure of interest rate model in Indonesia is based on the Svensson (1994) model development which has accepted globally and being used by most countries. However, the model has tendency to be accurate in short- and medium-term but less accurate in longer term due to low population of bonds in long term maturity. The research of Diebold and Li in 2006 overcomes this situation with their simplification into three factors (level, slope and curvature) and one curvature loading. They suggested the value of curvature loading to be fixed in value 0.0609 which based on US bond market. The following research of Diebold, Rudebusch and Aruoba (DRA) in 2007 introduce the model into state-space representation. With the DRA model, the authors could find the new curvature loading into country specific bond market. With the curvature that is based on specific country, the calculation of the term structure would be more applicable. Therefore, the authors propose to use their method to find the alternative curvature loading for Indonesia bond market context.

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