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


Novales Cinca, Alfonso y 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.

Tipo de documento:Documento de trabajo o Informe técnico
Información Adicional:

JEL Classification: E37, E43

Palabras clave:Factor models, Term structure of interest rates, Principal components, Swap markets, IRS
Materias:Ciencias Sociales > Economía > Mercados bursátiles y financieros
Título de serie o colección:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
Código ID:7681

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Última Modificación:06 Feb 2014 07:55

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