IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The Dynamics of Economic Functions: Modelling and Forecasting the Yield Curve

  • Clive G. Bowsher
  • Roland Meeks

The class of Functional Signal plus Noise (FSN) models is introduced that provides a new, general method for modelling and forecasting time series of economic functions.� The underlying, continuous economic function (or 'signal') is a natural cubic spline whose dynamic evolution is driven by a cointegrated vector autoregression for the ordinates (or 'y-values') at the knots of the spline.� The natural cubic spline provides flexible cross-sectional fit and results in a linear, state space model.� This FSN model achieves dimension reduction, provides a coherent description of the observed yield curve and its dynamics as the cross-sectional dimension N becomes large, and can feasibly be estimated and used for forecasting when N is large.� The integration and cointegration properties of the model are derived.� The FSN models are then applied to forecasting 36-dimensional yield curves for US Treasury bonds at the one month ahead horizon.� The method consistently outperforms the Diebold and Li (2006) and random walk forecasts on the basis of both mean square forecast error criteria and economically relevant loss functions derived from the realised profits of pairs trading algorithms.� The analysis also highlights in a concrete setting the dangers of attempts to infer the relative economic value of model forecasts on the basis of their associated mean square forecast errors.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2008-WO5.

as
in new window

Length:
Date of creation: 01 Mar 2008
Date of revision:
Handle: RePEc:oxf:wpaper:2008-wo5
Contact details of provider: Postal: Manor Rd. Building, Oxford, OX1 3UQ
Web page: http://www.economics.ox.ac.uk/
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Clements, M.P. & Hendry, D., 1992. "On the Limitations of Comparing Mean Square Forecast Errors," Economics Series Working Papers 99138, University of Oxford, Department of Economics.
  2. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
  3. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
  4. Boivin, Jean & Ng, Serena, 2005. "Understanding and Comparing Factor-Based Forecasts," MPRA Paper 836, University Library of Munich, Germany.
  5. Marius Ooms & Bj�rn de Groot & Siem Jan Koopman, 1999. "Time-Series Modelling of Daily Tax Revenues," Computing in Economics and Finance 1999 312, Society for Computational Economics.
  6. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
  7. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September.
  8. Clive Bowsher & Roland Meeks, 2006. "The Impossibility of Stationary Yield Spreads and I(1) Yields under the Expectations Theory of the Term Structure," Economics Series Working Papers 2006-W05, University of Oxford, Department of Economics.
  9. Siem Jan Koopman & Neil Shephard & Jurgen A. Doornik, 1999. "Statistical algorithms for models in state space using SsfPack 2.2," Econometrics Journal, Royal Economic Society, vol. 2(1), pages 107-160.
  10. repec:dgr:uvatin:20070028 is not listed on IDEAS
  11. Clive G. Bowsher, 2004. "Modelling the Dynamics of Cross-Sectional Price Functions: an Econometric Analysis of the Bid and Ask Curves of an Automated Exchange," OFRC Working Papers Series 2004fe19, Oxford Financial Research Centre.
  12. Philippe C. Besse, 2000. "Autoregressive Forecasting of Some Functional Climatic Variations," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 27(4), pages 673-687.
  13. Mark Fisher & Douglas Nychka & David Zervos, 1995. "Fitting the term structure of interest rates with smoothing splines," Finance and Economics Discussion Series 95-1, Board of Governors of the Federal Reserve System (U.S.).
  14. Brian Sack, 2000. "Using Treasury STRIPS to measure the yield curve," Finance and Economics Discussion Series 2000-42, Board of Governors of the Federal Reserve System (U.S.).
  15. DeRossi, G. & Harvey, A., 2006. "Time-Varying Quantiles," Cambridge Working Papers in Economics 0649, Faculty of Economics, University of Cambridge.
  16. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
  17. Stock, James H. & Watson, Mark W., 2006. "Forecasting with Many Predictors," Handbook of Economic Forecasting, Elsevier.
  18. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
  19. Andrew Jeffrey & Oliver Linton & Thong Nguyen, 2006. "Flexible Term Structure Estimation: Which Method is Preferred?," Metrika, Springer, vol. 63(1), pages 99-122, February.
  20. Daniel F. Waggoner, 1997. "Spline methods for extracting interest rate curves from coupon bond prices," Working Paper 97-10, Federal Reserve Bank of Atlanta.
  21. Zellner, A., 1992. "Statistics, Science and Public Policy," Papers 92-21, California Irvine - School of Social Sciences.
  22. Shea, Gary S, 1992. "Benchmarking the Expectations Hypothesis of the Interest-Rate Term Structure: An Analysis of Cointegration Vectors," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(3), pages 347-66, July.
  23. Pagan, A.R. & Hall, A.D. & Martin, V., 1995. "Modelling the Term Structure," Papers 284, Australian National University - Department of Economics.
  24. Tao Wu & Glenn Rudebusch, 2003. "Macroeconomics and the Yield Curve," Computing in Economics and Finance 2003 206, Society for Computational Economics.
  25. McCulloch, J Huston, 1975. "The Tax-Adjusted Yield Curve," Journal of Finance, American Finance Association, vol. 30(3), pages 811-30, June.
  26. De Pooter, Michiel & Ravazzolo, Francesco & van Dijk, Dick, 2006. "Predicting the term structure of interest rates incorporating parameter uncertainty, model uncertainty and macroeconomic information," MPRA Paper 2512, University Library of Munich, Germany, revised 03 Mar 2007.
  27. repec:dgr:uvatin:20080007 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:oxf:wpaper:2008-wo5. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Caroline Wise)

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.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.