Approximate Factor Models for Functional Time Series

Sven Otto and Nazarii Salish

Abstract: We propose a novel approximate factor model tailored for analyzing time-dependent curve data. Our model decomposes such data into two distinct components: a low-dimensional predictable factor component and an unpredictable error term. These components are identified through the autocovariance structure of the underlying functional time series. The model parameters are consistently estimated using the eigencomponents of a cumulative autocovariance operator and an information criterion is proposed to determine the appropriate number of factors. The methodology is applied to yield curve modeling and forecasting. Our results indicate that more than three factors are required to characterize the dynamics of the term structure of bond yields.

Date: 2022-01, Revised 2024-05
New Economics Papers: this item is included in nep-dcm, nep-ecm, nep-ets and nep-his
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