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

62 Pages Posted: 17 Jun 2014

See all articles by Fulvio Pegoraro

Fulvio Pegoraro

Banque de France - Economics and Finance Research Center; CREST - Laboratoire de Finance et Assurance

Andrew F. Siegel

University of Washington - Department of Finance and Business Economics; National Bureau of Economic Research (NBER)

Luca Pezzoli

Banque de France

Date Written: June 2014

Abstract

Using a common database, we provide a controlled empirical comparison of recently-proposed 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 interpolate 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.

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

JEL Classification: G12, E43, C52

Suggested Citation

Pegoraro, Fulvio and Siegel, Andrew F. and Pezzoli, Luca, International Yield Curves and Principal Components Selection Techniques: An Empirical Assessment (June 2014). Banque de France Working Paper No. 489, Available at SSRN: https://ssrn.com/abstract=2451018 or http://dx.doi.org/10.2139/ssrn.2451018

Fulvio Pegoraro (Contact Author)

Banque de France - Economics and Finance Research Center ( email )

31 rue Croix des Petits Champs
75049 Paris Cedex 01 France
France
00.33.(0)1.42.92.91.67 (Phone)
00.33.(0)1.42.92.48.18 (Fax)

CREST - Laboratoire de Finance et Assurance ( email )

15, Boulevard Gabriel Péri
Bureau 1112 - Timbre J320
92245 Malafokk Cedex France, 92245
France
00.33.(0)1.41.17.77.97 (Phone)
00.33.(0)1.41.17.76.66 (Fax)

HOME PAGE: http://www.crest.fr/pageperso/pegoraro/pegoraro.htm

Andrew F. Siegel

University of Washington - Department of Finance and Business Economics ( email )

Box 353200
Seattle, WA 98195
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Luca Pezzoli

Banque de France ( email )

Paris
France

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
86
Abstract Views
1,472
rank
327,397
PlumX Metrics