International yield curve prediction with common functional principal component analysis

International yield curve prediction with common functional principal component analysis

We propose an international yield curve predictive model, where common factors are identified using the common functional principal component (CFPC) method that enables a comparison of the variation patterns across different economies with heterogeneous covariances. The dynamics of the international...

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Bibliographic Details
Main Authors: ZHANG, Jiejie, CHEN, Ying, KLOTZ, Stefan, LIM, Kian Guan
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2017
Subjects:
Yield curve forecasting
Common factors
Econometrics
Finance
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/5342
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Institution: Singapore Management University
Language: English
Description
Summary:We propose an international yield curve predictive model, where common factors are identified using the common functional principal component (CFPC) method that enables a comparison of the variation patterns across different economies with heterogeneous covariances. The dynamics of the international yield curves are further forecasted based on the data-driven common factors in an autoregression framework. For the 1-day ahead out-of-sample forecasts of the US, Sterling, Euro and Japanese yield curve from 07 April 2014 to 06 April 2015, the CFPC factor model is compared with an alternative factor model based on the functional principal component analysis.

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