Functional Lagged Regression of Treasury Yields and Macroeconomic Data

Summary

This study models the US Treasury yield curve as a latent continuous function observed only at a sparse set of maturities. Treating successive yield curves as a sparsely observed functional time series lets the authors examine how earlier macroeconomic variables relate to yields across the curve. They use non-parametric statistical inference for functional time series and lagged regression, rather than imposing a specific parametric yield-curve form.

The analysis reports that the federal funds rate has a strong association with the short end of the Treasury curve, while annual inflation has a moderate effect on longer maturities. These findings are consistent with earlier results obtained under parametric assumptions. The description does not provide sample dates, uncertainty estimates, or causal identification details, so the reported relationships should be read as statistical dependence rather than proof of causal effects or a standalone trading signal.

Key ideas

• The yield curve is modeled as a latent continuous function measured sparsely across maturities.
• The analysis uses non-parametric methods for sparsely observed functional time series.
• Lagged regression finds a strong federal funds rate relationship at the short end of the curve.
• Annual inflation is reported to have a moderate relationship with longer-term Treasury yields.

Tags

# Yield curve and macroeconomy interaction: evidence from the non-parametric functional lagged regression approach


# Yield curve and macroeconomy interaction: evidence from the non-parametric functional lagged regression approach









Viewing a yield curve as a sparse collection of measurements on a latent continuous random function allows us to model it statistically as a sparsely observed functional time series. Doing so, we use the state-of-the-art methods in non-parametric statistical inference for sparsely observed functional time series to analyse the lagged regression dependence of the US Treasury yield curve on US macroeconomic variables. Our non-parametric analysis confirms previous findings established under parametric assumptions, namely a strong impact of the federal funds rate on the short end of the yield curve and a moderate effect of the annual inflation on the longer end of the yield curve.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.