Explaining Yield Curve Dynamics
Journal
Journal of Fixed Income
ISSN
1059-8596
Type
journal article
Date Issued
2011-10
Author(s)
Abstract
Yield curve dynamics are usually analyzed in terms of the unobservable components-level, slope, and curvature. The factor-augmented vector autoregression (FAVAR) framework applied in this article has become increasingly popular for forecasting interest rates. To link these two strands of research, the authors operate in the space of latent yield and latent macroeconomic factors to analyze the relationship between the term structure of interest rates and the macroeconomic aggregates. They predict the yield curve dynamics by directly forecasting the unobservable yield curve factors. They use the FAVAR methodology to encompass a data-rich environment and to identify dynamic responses of the yield curve to the macroeconomic variables. The empirical results suggest that parsimonious FAVAR models with a few latent macroeconomic factors and a reduced lag order show superior short-horizon forecast performance over simple VAR systems and univariate autoregressions.
Language
English
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Institutional Investor Journals
Publisher place
New York
Volume
21
Number
2
Start page
68
End page
87
Pages
20
Subject(s)
Eprints ID
216290