Advanced Search
MyIDEAS: Login to save this paper or follow this series

Dynamic Factor Models with Smooth Loadings for Analyzing the Term Structure of Interest Rates

Contents:

Author Info

  • Borus Jungbacker

    (VU University Amsterdam)

  • Siem Jan Koopman

    (VU University Amsterdam)

  • Michel van der Wel

    (Erasmus University Rotterdam, ERIM, CREATES)

Abstract

We propose a new approach to the modelling of the term structure of interest rates. We consider the general dynamic factor model and show how to impose smoothness restrictions on the factor loadings. We further present a statistical procedure based on Wald tests that can be used to find a suitable set of such restrictions. We present these developments in the context of term structure models, but they are also applicable in other settings. We perform an empirical study using a data set of unsmoothed Fama-Bliss zero yields for US treasuries of different maturities. The general dynamic factor model with and without smooth loadings is considered in this study together with models that are associated with Nelson-Siegel and arbitrage-free frameworks. These existing models can be regarded as special cases of the dynamic factor model with restrictions on the model parameters. For all model candidates, we consider both stationary and nonstationary autoregressive processes (with different numbers of lags) for the latent factors. Finally, we perform statistical hypothesis tests to verify whether the restrictions imposed by the models are supported by the data. Our main conclusion is that smoothness restrictions can be imposed on the loadings of dynamic factor models for the term structure of US interest rates but that the restrictions implied by a number of popular term structure models are rejected.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://papers.tinbergen.nl/09041.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 09-041/4.

as in new window
Length:
Date of creation: 00 0000
Date of revision: 17 Sep 2010
Handle: RePEc:dgr:uvatin:20090041

Contact details of provider:
Web page: http://www.tinbergen.nl

Related research

Keywords: Fama-Bliss data set; Kalman filter; Maximum likelihood; Yield curve;

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Robert R. Bliss, 1997. "Movements in the term structure of interest rates," Economic Review, Federal Reserve Bank of Atlanta, Federal Reserve Bank of Atlanta, issue Q 4, pages 16-33.
  2. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
  3. Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2338, C.E.P.R. Discussion Papers.
  4. Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, Elsevier, vol. 164(1), pages 4-20, September.
  5. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  6. Clive G. Bowsher & Roland Meeks, 2008. "The Dynamics of Economic Functions: Modelling and Forecasting the Yield Curve," Economics Papers 2008-W05, Economics Group, Nuffield College, University of Oxford.
  7. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198523543, October.
  8. Doz, Catherine & Giannone, Domenico & Reichlin, Lucrezia, 2006. "A Quasi Maximum Likelihood Approach for Large Approximate Dynamic Factor Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5724, C.E.P.R. Discussion Papers.
  9. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, Elsevier, vol. 130(2), pages 337-364, February.
  10. de Jong, Frank, 2000. "Time Series and Cross-Section Information in Affine Term-Structure Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 18(3), pages 300-314, July.
  11. Engle, Robert F., 1984. "Wald, likelihood ratio, and Lagrange multiplier tests in econometrics," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 13, pages 775-826 Elsevier.
  12. Allan W. Gregory & Allen C. Head & Jacques Raynauld, 1994. "Measuring World Business Cycles," Working Papers, Queen's University, Department of Economics 902, Queen's University, Department of Economics.
  13. Koopman, S.J.M. & Durbin, J., 1998. "Fast Filtering and Smoothing for Multivariate State Space Models," Discussion Paper, Tilburg University, Center for Economic Research 1998-18, Tilburg University, Center for Economic Research.
  14. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
  15. Thomas J. Sargent & Christopher A. Sims, 1977. "Business cycle modeling without pretending to have too much a priori economic theory," Working Papers, Federal Reserve Bank of Minneapolis 55, Federal Reserve Bank of Minneapolis.
  16. Jushan Bai, 2003. "Inferential Theory for Factor Models of Large Dimensions," Econometrica, Econometric Society, Econometric Society, vol. 71(1), pages 135-171, January.
  17. Connor, Gregory & Korajczyk, Robert A, 1993. " A Test for the Number of Factors in an Approximate Factor Model," Journal of Finance, American Finance Association, American Finance Association, vol. 48(4), pages 1263-91, September.
  18. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dgr:uvatin:20090041. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Antoine Maartens (+31 626 - 160 892)).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.