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Yield curve modeling and forecasting using semiparametric factor dynamics

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  • Wolfgang K. Härdle
  • Piotr Majer
Abstract
Using a dynamic semiparametric factor model (DSFM) we investigate the term structure of interest rates. The proposed methodology is applied to monthly interest rates for four southern European countries: Greece, Italy, Portugal and Spain from the introduction of the Euro to the recent European sovereign-debt crisis. Analyzing this extraordinary period, we compare our approach with the standard market method – dynamic Nelson–Siegel model. Our findings show that two nonparametric factors capture the spatial structure of the yield curve for each of the bond markets separately. We attributed both factors to the slope of the yield curve. For panel term structure data, three nonparametric factors are necessary to explain 95% variation. The estimated factor loadings are unit root processes and reveal high persistency. In comparison with the benchmark model, the DSFM technique shows superior short-term forecasting in times of financial distress.

Suggested Citation

  • Wolfgang K. Härdle & Piotr Majer, 2016. "Yield curve modeling and forecasting using semiparametric factor dynamics," The European Journal of Finance, Taylor & Francis Journals, vol. 22(12), pages 1109-1129, September.
    • Handle: RePEc:taf:eurjfi:v:22:y:2016:i:12:p:1109-1129
    DOI: 10.1080/1351847X.2014.926281
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    Cited by:

    1. repec:hum:wpaper:sfb649dp2017-027 is not listed on IDEAS
    2. Zongwu Cai & Jiazi Chen & Linlin Niu, 2021. "A Semiparametric Model for Bond Pricing with Life Cycle Fundamental," Working Papers 2021-01-06, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    3. Petra Burdejová & Wolfgang K. Härdle, 2019. "Dynamic semi-parametric factor model for functional expectiles," Computational Statistics, Springer, vol. 34(2), pages 489-502, June.
    4. Feng, Pan & Qian, Junhui, 2018. "Forecasting the yield curve using a dynamic natural cubic spline model," Economics Letters, Elsevier, vol. 168(C), pages 73-76.
    5. Zongwu Cai & Jiazi Chen & Linlin Liu, 2021. "Estimating Impact of Age Distribution on Bond Pricing: A Semiparametric Functional Data Analysis Approach," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202102, University of Kansas, Department of Economics, revised Jan 2021.
    6. repec:hum:wpaper:sfb649dp2017-026 is not listed on IDEAS
    7. Siem Jan Koopman & Julia Schaumburg & Quint Wiersma, 2021. "Joint Modelling and Estimation of Global and Local Cross-Sectional Dependence in Large Panels," Tinbergen Institute Discussion Papers 21-008/III, Tinbergen Institute.
    8. Chen, Likai & Wang, Weining & Wu, Wei Biao, 2017. "Dynamic semiparametric factor model with a common break," SFB 649 Discussion Papers 2017-026, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.

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