Title: The position of the hump as a predictor of the treasury yield curve: A cointegration approach
Authors: Arturo Leccadito - Università della Calabria (Italy) [presenting]
Abstract: The study proposes using a new factor to describe the temporal relationship between interest rates on Treasury securities. This new factor is described by the position of the hump in the yield curve along the maturity axis and it is affected only when movements in the slope parameter are not matched by moves in the curvature. As it is common in the literature, we find that Treasury rates are non-stationary and form a cointegrated system. Using daily data for the period 2006-2018, we first calculate the new parameter using a non-parametric method and subsequently show that changes in the position of the hump are significant in explaining the short-run dynamics of Treasury rates. Furthermore, we document that adding the variable to short-run dynamics of the vector error correction model (VECM) increases its forecasting ability. Finally, as a robustness check, the study employs data at a different frequency (monthly) in order to make it possible the use of additional macroeconomic variables (like inflation and the Federal Funds Rate) in the short-run dynamics of the VECM. Information criteria confirm the superiority of VECMs that include changes in the position of the hump as an exogenous variable.