Intelligible Factors for the Yield Curve

Yvan Lengwiler () and Carlos Lenz ()
Additional contact information
Carlos Lenz: Swiss National Bank, Postal: Boersenstrasse 15, 8022 Zurich, http://www.snb.ch

No 2008-2, Working Papers from Swiss National Bank

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.

Keywords: yield curve; factor models; structural vector autoregression; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2008-04-30

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