Financial Big Data Solutions for State Space Panel Regression in Interest Rates Dynamics

93 Pages Posted: 22 Feb 2018 Last revised: 27 Mar 2018

See all articles by Dorota Toczydlowska

Dorota Toczydlowska

The Department of Statistical Science, University College London

Gareth Peters

Department of Actuarial Mathematics and Statistics, Heriot-Watt University; University College London - Department of Statistical Science; University of Oxford - Oxford-Man Institute of Quantitative Finance; London School of Economics & Political Science (LSE) - Systemic Risk Centre; University of New South Wales (UNSW) - Faculty of Science

Date Written: February 27, 2018

Abstract

A novel class of dimension reduction methods is combined with a stochastic multi-factor panel regression-based state-space model in order to model the dynamic of yield curves whilst incorporating regression factors. This is achieved via Probabilistic Principal Component Analysis (PPCA) in which new statistically robust variants are derived also treating missing data. We embed the rank reduced feature extractions into a stochastic representation for state-space models for yield curve dynamics and compare the results to classical multi-factor dynamic Nelson-Siegel state-space models. This leads to important new representations of yield curve models that can be practically important for addressing questions of financial stress testing and monetary policy interventions which can incorporate efficiently financial big data. We illustrate our results on various financial and macroeconomic data sets from the Euro Zone and international market.

Keywords: Interest Rates, yield curves, financial big data, probabilistic PCA, Feater Extraction, State Space Models, dynamic models

Suggested Citation

Toczydlowska, Dorota and Peters, Gareth, Financial Big Data Solutions for State Space Panel Regression in Interest Rates Dynamics (February 27, 2018). Available at SSRN: https://ssrn.com/abstract=3122202 or http://dx.doi.org/10.2139/ssrn.3122202

Dorota Toczydlowska

The Department of Statistical Science, University College London ( email )

London

Gareth Peters (Contact Author)

Department of Actuarial Mathematics and Statistics, Heriot-Watt University ( email )

Edinburgh Campus
Edinburgh, EH14 4AS
United Kingdom

HOME PAGE: http://garethpeters78.wixsite.com/garethwpeters

University College London - Department of Statistical Science ( email )

1-19 Torrington Place
London, WC1 7HB
United Kingdom

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

University of Oxford Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

London School of Economics & Political Science (LSE) - Systemic Risk Centre ( email )

Houghton St
London
United Kingdom

University of New South Wales (UNSW) - Faculty of Science ( email )

Australia

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