An Error Correction Factor Model of Term Structure Slopes in International Swaps 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 InfoPaper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0222.
Length: pages 19
Date of creation: 2002
Date of revision:
Factor models; Term structure of interest rates; Principal components; Swap markets; IRS.;
Other versions of this item:
- Abad, Pilar & Novales, Alfonso, 2005. "An error correction factor model of term structure slopes in international swap markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(3), pages 229-254, July.
- 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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