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An Empirical Analysis of Spot and Forward Interest Rates in Seven European Countries via Principal Component Analysis and the Malliavin-Mancino Method

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  • Nien-Lin Liu

    (Tokyo University of Science)

  • Ryoichi Suzuki

    (Ritsumeikan University)

Abstract

Building upon the empirical studies by Liu (2:57–60, 2010) and Liu and Mancino (2012), we investigate the determinants influencing the term structure of interest rates in seven European countries: Austria, Belgium, Britain, France, Germany, Italy, and Spain. We use two methods, namely principal component analysis (PCA) for covariance matrix estimated by realized volatility estimator and PCA of integrated volatility estimated by Malliavin-Mancino (MM) estimator using Fourier series method proposed by Malliavin and Mancino (6:49–61, 2002; 37: 1983–2010, 2009), to examine spot rates and forward rates derived from zero-coupon bond data. The results of the study confirm that although three factors account for the majority of spot rate variability, a more significant number of factors is essential to capture forward rate dynamics adequately. This research complements the results established by earlier studies, providing a more comprehensive understanding of interest rate dynamics across these European markets.

Suggested Citation

  • Nien-Lin Liu & Ryoichi Suzuki, 2025. "An Empirical Analysis of Spot and Forward Interest Rates in Seven European Countries via Principal Component Analysis and the Malliavin-Mancino Method," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 32(4), pages 1571-1616, December.
    • Handle: RePEc:kap:apfinm:v:32:y:2025:i:4:d:10.1007_s10690-024-09498-z
    DOI: 10.1007/s10690-024-09498-z
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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