Using a common database, we provide a controlled empirical comparison of recentlyproposed principal component (PC) methods for selecting a combination of common and local factors that characterize the joint dynamics of multi-country term structures. We build a database of daily Treasury yield curves for U.S., Germany, U.K. and Japan, using common criteria to filter coupon bond data, to ensure liquidity, and to nterpolate the discount function. We then estimate each proposed PC method for all subgroups of these countries, using both yield levels and yield differences at weekly frequency. We find, in general, that the proposed methods do not agree with one another on the preferred combination of common and/or local factors. We identify the explained variability decision criterion as an important source of this lack of agreement and recommend consideration of alternative statistical model selection techniques for the purpose of identifying common and local yield curve factors in international data.
Pegoraro, F., Siegel, A. F., Tiozzo Pezzoli, L., International Yield Curves and Principal Components Selection Techniques: An Empirical Assessment, <<Working papers Banque de France>>, 2014; (489): 1-58. 10.2139/ssrn.2451018 [http://hdl.handle.net/10807/153919]
International Yield Curves and Principal Components Selection Techniques: An Empirical Assessment
Tiozzo Pezzoli, Luca
2014
Abstract
Using a common database, we provide a controlled empirical comparison of recentlyproposed principal component (PC) methods for selecting a combination of common and local factors that characterize the joint dynamics of multi-country term structures. We build a database of daily Treasury yield curves for U.S., Germany, U.K. and Japan, using common criteria to filter coupon bond data, to ensure liquidity, and to nterpolate the discount function. We then estimate each proposed PC method for all subgroups of these countries, using both yield levels and yield differences at weekly frequency. We find, in general, that the proposed methods do not agree with one another on the preferred combination of common and/or local factors. We identify the explained variability decision criterion as an important source of this lack of agreement and recommend consideration of alternative statistical model selection techniques for the purpose of identifying common and local yield curve factors in international data.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.