Large-dimensional cointegrated threshold factor models: The Global Term Structure of Interest Rates

Paulo Rodrigues and Daniel Abreu

Working Papers from Banco de Portugal, Economics and Research Department

Abstract: We extend the two-level factor model to account for cointegration between groupspecific factors in large datasets. We propose two nonlinear specifications: (i) a threshold vector error correction model (VECM) that accounts for asymmetric responses across regimes; and (ii) a band VECM that captures discontinuous state-dependent adjustment which activates only when deviations from equilibrium exceed a certain threshold. We examine the small-sample performance of both models through Monte Carlo simulations. In an empirical application, we estimate a band factor VECM on a panel of government bond yields from multiple countries, estimating one global factor and two group-specific factors associated with long- and short-term maturities. The results provide evidence of a discontinuous adjustment in the global term structure of interest rates.

JEL-codes: C32 C38 E43 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ptu:wpaper:w202528

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