| dc.description.abstract | Understanding the yield curve characteristics and dynamics is important for many tasks such as
pricing financial assets, portfolio allocation, managing financial risk, and conducting monetary policy.
Therefore, it is important to use models that are interpretable, fits well, and make useful forecasts.
In this paper, I introduce a dynamic yield curve model with latent independent factors based on
Independent Component Analysis, which is a statistical method used successfully in other fields
than finance. I find that one can interpret the factors as level, slope, and curvature of the yield
curve. I also find that the ICA-based model fits the yield curve well and produce good forecasts. In
particular, it shows significantly better out-of-sample forecasts for the short-term maturities than the
commonly used dynamic Nelson-Siegel model. I find that the factors correlate with macroeconomic
variables such as monetary policy instrument, real economic activity, and inflation. Finally, I find
that the curvature factor seems to be more important than the previous literature state. | sv |
