International Yield Curves and Principal Components Selection Techniques: An Empirical Assessment

Fulvio Pegoraro, Andrew F. Siegel*, Luca Tiozzo Pezzoli

*Corresponding author

Research output: Working paper

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.
Original languageEnglish
Number of pages58
DOIs
Publication statusPublished - 2014
Externally publishedYes

Keywords

  • Nelson-Siegel term structure estimation techniques
  • common and local factors
  • explained variance
  • international Treasury yield curves database
  • principal component selection techniques

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