An error correction factor model of term structure slopes in international swap markets
AbstractThe 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.
Volume (Year): 15 (2005)
Issue (Month): 3 (July)
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Web page: http://www.elsevier.com/locate/intfin
Other versions of this item:
- Pilar Abad & Alfonso Novales, 2002. "An Error Correction Factor Model of Term Structure Slopes in International Swaps Markets," Documentos del Instituto Complutense de AnÃ¡lisis EconÃ³mico 0222, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales.
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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