Title: A dynamic functional factor model for yield curves: Identification, estimation, and prediction
Authors: Sven Otto - University of Bonn (Germany) [presenting]
Abstract: The problem of yield curve forecasting from a functional time series perspective is discussed. A functional factor model is considered, in which the factors follow some linear autoregressive process. The model is identified by imposing suitable conditions on the factors and the loading functions. By applying the least squares principle, a functional principal components based estimator is obtained, which is shown to be consistent. The minimum mean squared error forecast from the dynamic functional factor model is considered, and pointwise and simultaneous prediction bands are derived. Finally, the accuracy of the predictions and prediction bands is discussed in an out-of-sample experiment with monthly yield curves of U.S. Treasuries.