COVID-19 effects on the Canadian term structure of interest rates

In Canada, COVID-19 pandemic triggered exceptional monetary policy interventions by the central bank, which in March 2020 made multiple unscheduled cuts to its target rate. In this paper we assess the extent to which Bank of Canada interventions affected the determinants of the yield curve. In particular, we apply Functional Principal Component Analysis to the term structure of interest rates. We find that, during the pandemic, the long-run dependence of level and slope components of the yield curve is unchanged with respect to previous months, although the shape of the mean yield curve completely changed after target rate cuts. Bank of Canada was effective in lowering the whole yield curve and correcting the inverted hump of previous months, but it was not able to reduce the exposure to already existing long-run risks.

Probabilistic K-means with Local Alignment for Clustering and Motif Discovery in Functional Data

We develop a new method to locally cluster curves and discover functional motifs, that is, typical shapes that may recur several times along and across the curves capturing important local characteristics. In order to identify these shared curve portions, our method leverages ideas from functional data analysis (joint clustering and alignment of curves), bioinformatics (local alignment through the extension of high similarity seeds) and fuzzy clustering (curves belonging to more than one cluster, if they contain more than one typical shape). It can employ various dissimilarity measures and incorporate derivatives in the discovery process, thus exploiting complex facets of shapes. We demonstrate the performance of our method with an extensive simulation study, and show how it generalizes other clustering methods for functional data. Finally, we provide real data applications to Italian Covid-19 death curves and Omics data related to mutagenesis. Supplementary materials for this article are available online. © 2023 American Statistical Association, Institute of Mathematical Statistics, and Interface Foundation of North America.

COVID-19 effects on the Canadian term structure of interest rates

In Canada, COVID-19 pandemic triggered exceptional monetary policy interventions by the central bank, which in March 2020 made multiple unscheduled cuts to its target rate. In this paper we assess the extent to which Bank of Canada interventions affected the determinants of the yield curve. In particular, we apply Functional Principal Component Analysis to the term structure of interest rates. We find that, during the pandemic, the long-run dependence of level and slope components of the yield curve is unchanged with respect to previous months, although the shape of the mean yield curve completely changed after target rate cuts. Bank of Canada was effective in low-ering the whole yield curve and correcting the inverted hump of previous months, but it was not able to reduce the exposure to already existing long-run risks. © 2022, International Centre for Economic Analysis. All rights reserved.