Curve forecasting by functional autoregression
AbstractThis paper deals with the prediction of curve-valued autoregression processes. It develops a novel technique, predictive factor decomposition, for the estimation of the autoregression operator. The technique is based on finding a reduced-rank approximation to the autoregression operator that minimizes the expected squared norm of the prediction error. Implementing this idea, we relate the operator approximation problem to the singular value decomposition of a combination of cross-covariance and covariance operators. We develop an estimation method based on regularization of the empirical counterpart of this singular value decomposition, prove its consistency and evaluate convergence rates. The method is illustrated by an example of the term structure of the Eurodollar futures rates. In the sample corresponding to the period of normal growth, the predictive factor technique outperforms the principal components method and performs on a par with custom-designed prediction methods.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Multivariate Analysis.
Volume (Year): 99 (2008)
Issue (Month): 10 (November)
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Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/622892/description#description
Other versions of this item:
- V. Kargin & Alexei Onatski, 2004. "Curve Forecasting by Functional Autoregression," Discussion Papers 0405-18, Columbia University, Department of Economics.
- A. Onatski & V. Karguine, 2005. "Curve Forecasting by Functional Autoregression," Computing in Economics and Finance 2005 59, Society for Computational Economics.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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