TY - JOUR
T1 - Smooth Dynamic Factor Analysis with Application to the U.S. Term Structure of Interest Rates
AU - Jungbacker, B.M.J.P.
AU - Koopman, S.J.
AU - van der Wel, M.
PY - 2014
Y1 - 2014
N2 - We consider the dynamic factor model and show how smoothness restrictions can be imposed on factor loadings by using cubic spline functions. We develop statistical procedures based on Wald, Lagrange multiplier and likelihood ratio tests for this purpose. The methodology is illustrated by analyzing a newly updated monthly time series panel of US term structure of interest rates. Dynamic factor models with and without smooth loadings are compared with dynamic models based on Nelson-Siegel and cubic spline yield curves. We conclude that smoothness restrictions on factor loadings are supported by the interest rate data and can lead to more accurate forecasts. © 2013 John Wiley & Sons, Ltd.
AB - We consider the dynamic factor model and show how smoothness restrictions can be imposed on factor loadings by using cubic spline functions. We develop statistical procedures based on Wald, Lagrange multiplier and likelihood ratio tests for this purpose. The methodology is illustrated by analyzing a newly updated monthly time series panel of US term structure of interest rates. Dynamic factor models with and without smooth loadings are compared with dynamic models based on Nelson-Siegel and cubic spline yield curves. We conclude that smoothness restrictions on factor loadings are supported by the interest rate data and can lead to more accurate forecasts. © 2013 John Wiley & Sons, Ltd.
UR - https://www.scopus.com/pages/publications/84892847084
UR - https://www.scopus.com/inward/citedby.url?scp=84892847084&partnerID=8YFLogxK
U2 - 10.1002/jae.2319
DO - 10.1002/jae.2319
M3 - Article
SN - 0883-7252
VL - 29
SP - 65
EP - 90
JO - Journal of Applied Econometrics
JF - Journal of Applied Econometrics
IS - 1
ER -