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Curve forecasting by functional autoregression

  • Kargin, V.
  • Onatski, A.

This paper deals with the prediction of curve-valued autoregression processes. It develops a novel technique, predictive factor decomposition, for the estimation of the autoregression operator. The technique is based on finding a reduced-rank approximation to the autoregression operator that minimizes the expected squared norm of the prediction error. Implementing this idea, we relate the operator approximation problem to the singular value decomposition of a combination of cross-covariance and covariance operators. We develop an estimation method based on regularization of the empirical counterpart of this singular value decomposition, prove its consistency and evaluate convergence rates. The method is illustrated by an example of the term structure of the Eurodollar futures rates. In the sample corresponding to the period of normal growth, the predictive factor technique outperforms the principal components method and performs on a par with custom-designed prediction methods.

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Article provided by Elsevier in its journal Journal of Multivariate Analysis.

Volume (Year): 99 (2008)
Issue (Month): 10 (November)
Pages: 2508-2526

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Handle: RePEc:eee:jmvana:v:99:y:2008:i:10:p:2508-2526
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  1. He, Guozhong & Müller, Hans-Georg & Wang, Jane-Ling, 2003. "Functional canonical analysis for square integrable stochastic processes," Journal of Multivariate Analysis, Elsevier, vol. 85(1), pages 54-77, April.
  2. Robert R. Bliss, 1997. "Movements in the term structure of interest rates," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 16-33.
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