Novales Cinca, Alfonso and Abad Romero, Pilar (2002) An error correction factor model of term structure slopes in international swaps markets. [Working Paper or Technical Report]
Official URL: http://eprints.ucm.es/7681/
The first two principal components in the vector of term structure slopes from IRS
markets in eight major currencies can be approximately identified as the slopes for the US dollar
and Deutsche mark. Each of the eight slopes considered is cointegrated with these two factors.
The implied Error Correction models can be very fruitful for short and medium term slope
forecasting for the eight currencies. This scheme achieves a drastic reduction of dimensionality,
since the eight slopes can be predicted using just univariate forecasts for the two factors. Adding
more factors to the model does not lead to a significant improvement in forecasting performance,
while forecasts obtained using just one factor are not as good as those from two-factor Error
|Item Type:||Working Paper or Technical Report|
|Additional Information:||JEL Classification: E37, E43|
|Uncontrolled Keywords:||Factor models, Term structure of interest rates, Principal components, Swap markets, IRS|
|Subjects:||Social sciences > Economics > Stock exchanges|
|Series Name:||Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)|
Abad, P., and Novales, A., 2002, A forecasting comparison of alternative models for term structure slopes in IRS markets, manuscript, Universidad Complutense, Madrid.
Domínguez, E., and A.Novales, 2002, A factor model of term structure slopes in Eurocurrency markets, Applied Economics Letters 9, 585-593.
Domínguez, E., and A.Novales, 2000, Dynamic correlations and forecasting of term structure slopes in Eurocurrency markets, The International Journal of Finance 12, 3, 1807-1822.
Estrella, A., and G.A.Hardouvelis, 1991, The term structure as a predictor of real economic activity, The Journal of Finance 46, 555-576.
Hardouvelis, G.A., 1994, The term structure spread and future changes in long and short rates in the G7 countries, Journal of Monetary Economics, 25, 59-76.
Knez, P.J., Litterman, R., and Scheinkman, J., 1994, Explorations into factors explaining money market returns, Journal of Finance 49, 1861-1882.
Litterman, R., and Scheinkman, J., 1991, Common factor affecting bond returns, Journal of Fixed Income 1, 54-61.
Plosser, C.I., and Rouwenhorst, K.G., 1994, International term structures and real economic growth, Journal of Monetary Economics, 22, 133-155.
Steeley, J.M., 1990, Modeling the dynamics of the term structure of interest rates, The Economic and Social Review 21, 337-661.
Stock, J., and M.Watson, 1988, Testing for common trends, Journal of the American Statistical Association, 1097-1107.
|Deposited On:||04 Mar 2008|
|Last Modified:||06 Feb 2014 07:55|
Repository Staff Only: item control page