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An error correction factor model of term structure slopes in international swaps markets

Novales Cinca, Alfonso and Abad Romero, Pilar (2002) An error correction factor model of term structure slopes in international swaps markets. [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 0222, 2002, ]


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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
Correction models.

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)
ID Code:7681

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Deposited On:04 Mar 2008
Last Modified:06 Feb 2014 07:55

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