A dynamic factor model of the yield curve components as a predictor of the economy

Marcelle Chauvet and Zeynep Senyuz

International Journal of Forecasting, 2016, vol. 32, issue 2, 324-343

Abstract: In this paper, we propose an econometric model of the joint dynamic relationship between the Treasury yield curve components and the economy, for predicting business cycle turning points. The nonlinear multivariate dynamic factor model takes into account not only the popular slope, but also information extracted from the level and curvature of the yield curve, and from macroeconomic variables. We investigate the interrelationship between the phases of cyclical fluctuations in yield curve components and the phases of the business cycle. The results indicate a strong interrelationship between the yield curve and the economy. The proposed model has substantial incremental predictive value relative to alternative specifications. This result holds both in-sample and out-of-sample, using revised and real time unrevised data.

Keywords: Forecasting; Business cycles; Nonlinear; Term spread; Dynamic factor models; Markov switching (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:32:y:2016:i:2:p:324-343

DOI: 10.1016/j.ijforecast.2015.05.007

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