IDEAS home Printed from https://ideas.repec.org/p/anc/wpaper/503.html

A rotated Dynamic Factor Model for the yield curve: squeezing out information when it matters

Author

Listed:
  • Chiara Casoli

    (InsIDE Lab, DiEco, Universita' degli Studi dell'Insubria, Fondazione Eni Enrico Mattei)

  • Riccardo Lucchetti

    (Dipartimento di Scienze Economiche e Sociali - Universita' Politecnica delle Marche)

Abstract

The yield curve is widely regarded as a powerful descriptor of the economy and market expectations. A common approach to its statistical representation relies on a small number of factors summarizing the curve, which can then be used to forecast real economic activity. We argue that optimal factor extraction is crucial for retrieving information when considering an approximate factor model. By introducing a rotation of the model including cointegration, we reduce cross-sectional dependence in the idiosyncratic components. This leads to improved forecasts of key macroeconomic variables during periods of economic and financial instability, both in the US and the euro area.

Suggested Citation

  • Chiara Casoli & Riccardo Lucchetti, 2026. "A rotated Dynamic Factor Model for the yield curve: squeezing out information when it matters," Working Papers 503, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    • Handle: RePEc:anc:wpaper:503
    as

    Download full text from publisher

    File URL: http://docs.dises.univpm.it/web/quaderni/pdf/503.pdf
    File Function: First version, 2026
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • 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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:anc:wpaper:503. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Maurizio Mariotti (email available below). General contact details of provider: https://edirc.repec.org/data/deancit.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.