Dynamics of Interest Rate Curve by Functional Auto-Regression

Vladislav Kargin () and Alexei Onatski ()

Macroeconomics from EconWPA

Abstract: 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.

Keywords: functional data analysis; term structure; principal components; canonical correlations; singular value decomposition (search for similar items in EconPapers)
JEL-codes: C14 E43 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2004-04-07, Revised 2004-10-28
Note: Type of Document - pdf; pages: 22
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http://129.3.20.41/eps/mac/papers/0404/0404008.pdf (application/pdf)

Related works:
Working Paper: Dynamics of Interest Rate Curve by Functional Auto-regression (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0404008

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