The Stability of Factor Models of Interest Rates

Francesco Audrino

Journal of Financial Econometrics, 2005, vol. 3, issue 3, 422-441

Abstract: The daily term structure of interest rates is filtered to reduce the influence of cross-correlations and autocorrelations on its factors. A three-factor model is fitted to the filtered data. We perform statistical tests, finding that factor loadings are unstable through time for daily data. This finding is not due to the presence of outliers nor to the selected number of factors. Such an instability problem can be solved when applying the factor analysis on multivariate scaled residuals, filtered using a nonparametric technique based on functional gradient descent. Copyright 2005, Oxford University Press.

Date: 2005
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