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A dynamic factor model of the yield curve components as a predictor of the economy

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  • Chauvet, Marcelle
  • Senyuz, Zeynep

Abstract

In this paper, we propose an econometric model of the joint dynamic relationship between the Treasury yield curve components and the economy, for predicting business cycle turning points. The nonlinear multivariate dynamic factor model takes into account not only the popular slope, but also information extracted from the level and curvature of the yield curve, and from macroeconomic variables. We investigate the interrelationship between the phases of cyclical fluctuations in yield curve components and the phases of the business cycle. The results indicate a strong interrelationship between the yield curve and the economy. The proposed model has substantial incremental predictive value relative to alternative specifications. This result holds both in-sample and out-of-sample, using revised and real time unrevised data.

Suggested Citation

  • Chauvet, Marcelle & Senyuz, Zeynep, 2016. "A dynamic factor model of the yield curve components as a predictor of the economy," International Journal of Forecasting, Elsevier, vol. 32(2), pages 324-343.
    • Handle: RePEc:eee:intfor:v:32:y:2016:i:2:p:324-343
    DOI: 10.1016/j.ijforecast.2015.05.007
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    8. Catherine Doz & Peter Fuleky, 2019. "Dynamic Factor Models," Working Papers 2019-4, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
    9. Bayaa, Yasmeen & Qadan, Mahmoud, 2024. "The shape of the Treasury yield curve and commodity prices," International Review of Financial Analysis, Elsevier, vol. 94(C).
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    11. Polat, Onur & Ozkan, Ibrahim, 2019. "Transmission mechanisms of financial stress into economic activity in Turkey," Journal of Policy Modeling, Elsevier, vol. 41(2), pages 395-415.

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