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Intelligible Factors for the Yield Curve

Author

Listed:
  • Yvan Lengwiler
  • Carlos Lenz

Abstract

We construct a factor model of the yield curve and specify time series processes for these factors, so that the innovations are mutually orthogonal. At the same time, the factors are constructed in such a way that they assume clear, intuitive interpretations. The resulting "intelligible factors" should prove useful for investment professionals to discuss expectations about yield curves and the implied dynamics. Moreover, they allow us to distinguish announced changes of the monetary policy stance versus monetary policy surprises, which are ctually rare. We identify two such events, namely September 11, 2001, and the Fed reaction to the recent subprime crisis.

Suggested Citation

  • Yvan Lengwiler & Carlos Lenz, 2008. "Intelligible Factors for the Yield Curve," Working Papers 2008-02, Swiss National Bank.
    • Handle: RePEc:snb:snbwpa:2008-02
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    File URL: https://www.snb.ch/en/publications/research/working-papers/2008/working_paper_2008_02
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    Cited by:

    1. Sven Otto & Nazarii Salish, 2022. "Approximate Factor Models for Functional Time Series," Papers 2201.02532, arXiv.org, revised Feb 2025.
    2. Paul Söderlind, 2010. "Reaction of Swiss Term Premia to Monetary Policy Surprises," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 146(I), pages 385-404, March.
    3. Morten L Bech & Yvan Lengwiler, 2012. "The financial crisis and the changing dynamics of the yield curve," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 257-276, Bank for International Settlements.
    4. Borus Jungbacker & Siem Jan Koopman & Michel van der Wel, 0000. "Dynamic Factor Models with Smooth Loadings for Analyzing the Term Structure of Interest Rates," Tinbergen Institute Discussion Papers 09-041/4, Tinbergen Institute, revised 17 Sep 2010.
    5. Lajos Horváth & Zhenya Liu & Curtis Miller & Weiqing Tang, 2024. "Breaks in term structures: Evidence from the oil futures markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2317-2341, April.
    6. Yifeng Yan & Ju'e Guo, 2015. "The Sovereign Yield Curve and the Macroeconomy in China," Pacific Economic Review, Wiley Blackwell, vol. 20(3), pages 415-441, August.
    7. Ranik Raaen Wahlstrøm & Florentina Paraschiv & Michael Schürle, 2022. "A Comparative Analysis of Parsimonious Yield Curve Models with Focus on the Nelson-Siegel, Svensson and Bliss Versions," Computational Economics, Springer;Society for Computational Economics, vol. 59(3), pages 967-1004, March.

    More about this item

    Keywords

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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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