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Forecasting the yield curve with the arbitrage-free dynamic Nelson-Siegel model: Brazilian evidence

Author

Listed:
  • João F. Caldeira

    (Universidade Federal do Rio Grande do Sul, Brazil)

  • Guilherme V. Moura

    (Universidade Federal de Santa Catarina, Brazil)

  • , Fabricio Tourrucôo

    (Universidade Federal de Santa Catarina, Brazil)

Abstract

We assess the extent to which the imposition of a no-arbitrage restriction on the dynamic Nelson-Siegel model helps obtaining more accurate forecasts ofthe term structure. Forthat purpose, we provide an empirical application based on a large panel ofBrazilian interestrate future contracts and testfor differencesin forecasting performance among alternative benchmark specificationsincluding the random walk, vector autoregressions, and the dynamic Nelson-Siegel. We show empirically that the arbitrage-free Nelson-Siegel model is able to outperform all other benchmark models when longer forecasting horizons are taken into account.

Suggested Citation

  • João F. Caldeira & Guilherme V. Moura & , Fabricio Tourrucôo, 2016. "Forecasting the yield curve with the arbitrage-free dynamic Nelson-Siegel model: Brazilian evidence," Economia, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 17(2), pages 221-237.
    • Handle: RePEc:anp:econom:v:17:y:2016:2:221_237
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    2. Eduardo Mineo & Airlane Pereira Alencar & Marcelo Moura & Antonio Elias Fabris, 2020. "Forecasting the Term Structure of Interest Rates with Dynamic Constrained Smoothing B-Splines," JRFM, MDPI, vol. 13(4), pages 1-14, April.

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