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Dynamics of Interest Rate Curve by Functional Auto-Regression

  • Vladislav Kargin

    (Cornerstone Research)

  • Alexei Onatski

    (Columbia University)

The paper uses functional auto-regression to predict the dynamics of interest rate curve. It estimates the auto-regressive operator by extending methods of the reduced-rank auto-regression to the functional data. Such an estimation technique is better suited for prediction purposes as opposed to the methods based either on principal components or canonical correlations. The consistency of the estimator is proved using methods of operator theory. The estimation method is used to analyze dynamics of Eurodollar futures rates. The results suggest that future movements of interest rates are predictable at 1-year horizons.

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File URL: http://econwpa.repec.org/eps/mac/papers/0404/0404008.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0404008.

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Length: 22 pages
Date of creation: 07 Apr 2004
Date of revision: 28 Oct 2004
Handle: RePEc:wpa:wuwpma:0404008
Note: Type of Document - pdf; pages: 22
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Ho, Thomas S Y & Lee, Sang-bin, 1986. " Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-29, December.
  2. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
  3. Heath, David & Jarrow, Robert & Morton, Andrew, 1990. "Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 419-440, December.
  4. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
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