Semiparametric Factor Model Outperforms Market Method in Yield Curve Forecasting.
The researchers used a new method to study interest rates in Southern European countries from the Euro introduction to the debt crisis. They found that their approach, called Dynamic Semiparametric Factor Model, was better at predicting short-term interest rate changes compared to the standard method. They discovered that two factors related to the slope of the yield curve were important for individual bond markets, while three factors were needed for overall data. The factors showed high persistence over time.