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.
Download InfoIf 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.
Bibliographic InfoPaper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 0222.
Length: pages 19
Date of creation: 2002
Date of revision:
Postal: Facultad de Ciencias Económicas y Empresariales. Pabellón prefabricado, 1ª Planta, ala norte. Campus de Somosaguas, 28223 - POZUELO DE ALARCÓN (MADRID)
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, 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
This paper has been announced in the following NEP Reports:
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.:
- Alfonso Novales & Emilio Domínguez, 2002.
"A factor model of term structure slopes in eurocurrency markets,"
Documentos de Trabajo del ICAE
0224, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
- Emilio Dominguez & Alfonso Novales, 2002. "A factor model of term structure slopes in Eurocurrency markets," Applied Economics Letters, Taylor & Francis Journals, vol. 9(9), pages 585-593.
- Gregory D. Sutton, 2000. "A defence of the expectations theory as a model of us long-term interest rates," BIS Working Papers 85, Bank for International Settlements.
- Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1996.
"On Biases in Tests of the Expecations Hypothesis of the Term Structure Of Interest Rates,"
NBER Technical Working Papers
0191, National Bureau of Economic Research, Inc.
- Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, Elsevier, vol. 44(3), pages 309-348, June.
- Geert Bekaert & Robert J. Hodrick & David Marshall, 1996. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Working Paper Series, Issues in Financial Regulation WP-96-3, Federal Reserve Bank of Chicago.
- Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Staff Papers, Palgrave Macmillan, vol. 40(4), pages 781-806, December.
- Engsted, Tom & Tanggaard, Carsten, 1994. "Cointegration and the US term structure," Journal of Banking & Finance, Elsevier, vol. 18(1), pages 167-181, January.
- Arturo Estrella & Frederic S. Mishkin, 1996.
"Predicting U.S. recessions: financial variables as leading indicators,"
9609, Federal Reserve Bank of New York.
- Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
- Arturo Estrella & Frederic S. Mishkin, 1995. "Predicting U.S. Recessions: Financial Variables as Leading Indicators," NBER Working Papers 5379, National Bureau of Economic Research, Inc.
- Arturo Estrella & Gikas A. Hardouvelis, 1989.
"The term structure as a predictor of real economic activity,"
8907, Federal Reserve Bank of New York.
- Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, American Finance Association, vol. 46(2), pages 555-76, June.
- Tom Engsted & Ken Nyholm, 2000. "Regime shifts in the Danish term structure of interest rates," Empirical Economics, Springer, Springer, vol. 25(1), pages 1-13.
- Longstaff, Francis A., 2000. "The term structure of very short-term rates: New evidence for the expectations hypothesis," Journal of Financial Economics, Elsevier, Elsevier, vol. 58(3), pages 397-415, December.
- Zuliu Hu, 1993. "The Yield Curve and Real Activity," IMF Working Papers 93/19, International Monetary Fund.
- Gikas A. Hardouvelis, 1987.
"The predictive power of the term structure during recent monetary regimes,"
8708, Federal Reserve Bank of New York.
- Hardouvelis, Gikas A, 1988. " The Predictive Power of the Term Structure during Recent Monetary Regimes," Journal of Finance, American Finance Association, American Finance Association, vol. 43(2), pages 339-56, June.
- Knez, Peter J & Litterman, Robert & Scheinkman, Jose Alexandre, 1994. " Explorations into Factors Explaining Money Market Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 49(5), pages 1861-82, December.
- Sauer, Christine & Scheide, Joachim, 1995. "Money, interest rate spreads, and economic activity," Open Access Publications from Kiel Institute for the World Economy 1664, Kiel Institute for the World Economy (IfW).
- Krylova, Elizaveta & Nikkinen, Jussi & VÃ¤hÃ¤maa, Sami, 2005.
"Cross-dynamics of volatility term structures implied by foreign exchange options,"
Working Paper Series, European Central Bank
0530, European Central Bank.
- Krylova, Elizaveta & Nikkinen, Jussi & VÃ¤hÃ¤maa, Sami, 2009. "Cross-dynamics of volatility term structures implied by foreign exchange options," Journal of Economics and Business, Elsevier, Elsevier, vol. 61(5), pages 355-375, September.
- MÃ³nica Fuentes & Sergio Godoy, 2005. "Sovereign Spread in Emerging Markets: A Principal Component Analysis," Working Papers Central Bank of Chile, Central Bank of Chile 333, Central Bank of Chile.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Águeda González Abad).
If references are entirely missing, you can add them using this form.