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Factor Vector Autoregressive Estimation of Heteroskedastic Persistent and Non Persistent Processes Subject to Structural Breaks: New Insights on the US OIS SPreads Term Structure

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  • Claudio Morana
Abstract
In the paper a general framework for large scale modeling of macroeconomic and financial time series is introduced. The proposed approach is characterized by simplicity of implementation, performing well independently of persistence and heteroskedasticity properties, accounting for common deterministic and stochastic factors. Monte Carlo results strongly support the proposed methodology, validating its use also for relatively small cross-sectional and temporal samples. By means of the proposed approach, new insights on US money market dynamics during the subprime and euro area financial crises are achieved. Moreover, three common factors, bearing the interpretation of level, slope and curvature factors, are extracted from the term structure of OIS spreads; we find the latter conveying additional information, relatively to commonly used credit risk measures like the TED or the BAA-AAA corporate spreads, which might be exploited, also within a composite indicator, for the construction of a risk barometer and real-time macroeconomic forecasting.

Suggested Citation

  • Claudio Morana, 2013. "Factor Vector Autoregressive Estimation of Heteroskedastic Persistent and Non Persistent Processes Subject to Structural Breaks: New Insights on the US OIS SPreads Term Structure," Working Papers 233, University of Milano-Bicocca, Department of Economics, revised Feb 2013.
    • Handle: RePEc:mib:wpaper:233
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    More about this item

    Keywords

    long and short memory; structural breaks; common factors; principal components analysis; fractionally integrated heteroskedastic factor vector autoregressive model; subprime crisis; euro area sovereign debt crisis;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G01 - Financial Economics - - General - - - Financial Crises

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