The paper uses functional auto-regression to predict the dynamics of interest rate curve. It estimates the auto-regressive operator by extending methods of the reduced-rank auto-regression to the functional data. Such an estimation technique is better suited for prediction purposes as opposed to the methods based either on principal components or canonical correlations. The consistency of the estimator is proved using methods of operator theory. The estimation method is used to analyze dynamics of Eurodollar futures rates. The results suggest that future movements of interest rates are predictable at 1-year horizons.
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Paper provided by EconWPA in its series Macroeconomics with number
0404008.
Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
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