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Large-dimensional cointegrated threshold factor models: The Global Term Structure of Interest Rates

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  • Paulo M.M. Rodrigues
  • Daniel Abreu

Abstract

We extend the two-level factor model to account for cointegration between groupspecific factors in large datasets. We propose two nonlinear specifications: (i) a threshold vector error correction model (VECM) that accounts for asymmetric responses across regimes; and (ii) a band VECM that captures discontinuous state-dependent adjustment which activates only when deviations from equilibrium exceed a certain threshold. We examine the small-sample performance of both models through Monte Carlo simulations. In an empirical application, we estimate a band factor VECM on a panel of government bond yields from multiple countries, estimating one global factor and two group-specific factors associated with long- and short-term maturities. The results provide evidence of a discontinuous adjustment in the global term structure of interest rates.

Suggested Citation

  • Paulo M.M. Rodrigues & Daniel Abreu, 2025. "Large-dimensional cointegrated threshold factor models: The Global Term Structure of Interest Rates," Working Papers w202528, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w202528
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • 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

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