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The forecasting ability of factor models of the term structure of IRS markets

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Novales Cinca, Alfonso and Abad Romero, Pilar (2002) The forecasting ability of factor models of the term structure of IRS markets. [ Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE); nº 21, 2002, ]

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Official URL: http://eprints.ucm.es/7680/


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Abstract

Using estimated principal components as factors, three-factors models are shown to produce forecasts comparable to those of autoregressive models for 2 to 10 year zaero coupon interest rates IRS markets both, for short- and medium- term forecasting horizons. Evidence is provided for the Deutsche mark, Spanish peseta, Japanese yen and US Dollar. Forecast from factor models are also shown to preserve the correlation matrix of interest rates across a given term structure, an important proprerty regarding risk management. The result is quite striking, because factor models are purely static, and forecasts for the factors must be obtained in advance of interest rate forecast.factor models


Item Type:Working Paper or Technical Report
Uncontrolled Keywords:Factor models, Term structure of interest rates, Principal components, Swap markets, IRS
Subjects:Social sciences > Economics > Economic structure
JEL:E37, E43
Series Name:Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)
Volume:2002
Number:21
ID Code:7680
Deposited On:04 Mar 2008
Last Modified:21 Jun 2017 11:18

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