A factor model of term structure slopes in eurocurrency markets

Abstract

This paper departs from previous research in dealing with dimensionality reduction in the space of
international term structure slopes. Recent empirical work has documented the existence of information in
the slope of the term structure which is relevant to forecast future changes in economic activity, and it is
additional to information in past economic activity, inflation, or in any leading indicator index [see
Estrella and Hardouvelis (1991), Stock and Watson (1988), Hardouvelis (1994) and Plosser and
Rouwenhorst (1994), among others]. This implies that a good forecasting model of term structure slopes
could be helpful to anticipate changes in economic activity with an even longer anticipation.