An Empirical Analysis of Spot and Forward Interest Rates in Seven European Countries via Principal Component Analysis and the Malliavin-Mancino Method

Nien-Lin Liu () and Ryoichi Suzuki ()
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Nien-Lin Liu: Tokyo University of Science
Ryoichi Suzuki: Ritsumeikan University

Asia-Pacific Financial Markets, 2025, vol. 32, issue 4, No 15, 1616 pages

Abstract: Abstract Building upon the empirical studies by Liu (2:57–60, 2010) and Liu and Mancino (2012), we investigate the determinants influencing the term structure of interest rates in seven European countries: Austria, Belgium, Britain, France, Germany, Italy, and Spain. We use two methods, namely principal component analysis (PCA) for covariance matrix estimated by realized volatility estimator and PCA of integrated volatility estimated by Malliavin-Mancino (MM) estimator using Fourier series method proposed by Malliavin and Mancino (6:49–61, 2002; 37: 1983–2010, 2009), to examine spot rates and forward rates derived from zero-coupon bond data. The results of the study confirm that although three factors account for the majority of spot rate variability, a more significant number of factors is essential to capture forward rate dynamics adequately. This research complements the results established by earlier studies, providing a more comprehensive understanding of interest rate dynamics across these European markets.

Keywords: Term structure of interest rates; Principal component analysis; Fourier series method; Malliavin-Mancino method; Spot rates; Forward rates; Integrated volatility; 91G30; 91G60; 62H25; 91B25; 60G35; 60G51; 91G70 (search for similar items in EconPapers)
JEL-codes: C13 C32 C58 E43 G12 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10690-024-09498-z

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