We consider the dynamic factor model and show how smoothness restrictions can be imposed on the factor loadings. Cubic spline functions are used to introduce smoothness in factor loadings. We develop statistical procedures based on Wald, Lagrange multiplier and likelihood ratio tests for this...

We extend the class of dynamic factor yield curve models for the inclusion of macro-economic factors. We benefit from recent developments in the dynamic factor literature for extracting the common factors from a large panel of macroeconomic series and for estimating the parameters in the model....