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Forecasting the yield curve in a data-rich environment: A no-arbitrage factor-augmented VAR approach

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  • Moench, Emanuel

Abstract

This paper suggests a term structure model which parsimoniously exploits a broad macroeconomic information set. The model uses the short rate and the common components of a large number of macroeconomic variables as factors. Precisely, the dynamics of the short rate are modeled with a Factor-Augmented Vector Autoregression and the term structure is derived using parameter restrictions implied by no-arbitrage. The model has economic appeal and provides better out-of-sample yield forecasts at intermediate and long horizons than a number of previously suggested approaches. The forecast improvement is highly significant and particularly pronounced for short and medium-term maturities.

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File URL: http://www.sciencedirect.com/science/article/B6VC0-4SXHB0H-1/2/5f52e2f72da7acafc3bf493b0a330268
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Bibliographic Info

Article provided by Elsevier in its journal Journal of Econometrics.

Volume (Year): 146 (2008)
Issue (Month): 1 (September)
Pages: 26-43

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Handle: RePEc:eee:econom:v:146:y:2008:i:1:p:26-43

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Web page: http://www.elsevier.com/locate/jeconom

Related research

Keywords: Yield curve Factor-augmented VAR Affine term structure models Dynamic factor models Forecasting;

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