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Estimating VAR models for the term structure of interest rates

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  • Vereda, Luciano
  • Lopes, Hélio
  • Fukuda, Regina
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    Abstract

    In this paper we follow the work of Evans and Marshall and propose new approaches for modelling the joint development of macro variables and the returns of government bond yields of several maturities. The models are estimated and compared with other forecasting schemes previously proposed in the literature, especially those relying on univariate, VAR and error correction methods. The models are then used to judge the hypothesis that the information content of macro variables and the term structure of interest rates as a whole help improving forecasting performance. Our main conclusion is quite simple: if one is interested in computing short-term forecasts, then there is no significant improvement in incorporating information other than the one already present in past observations of the yield at hand; however, if one worries about long-term forecasts (which is frequently the case with pension insurance companies), then the information content of macro variables and the term structure can improve forecasting performance.

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    File URL: http://www.sciencedirect.com/science/article/B6V8N-4NWCGRN-3/2/99775406e436cb0b4255a95a1140ff34
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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 42 (2008)
    Issue (Month): 2 (April)
    Pages: 548-559

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    Handle: RePEc:eee:insuma:v:42:y:2008:i:2:p:548-559

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    Web page: http://www.elsevier.com/locate/inca/505554

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    References

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    1. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    2. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
    3. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
    4. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
    5. Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
    6. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    7. Hall, Anthony D & Anderson, Heather M & Granger, Clive W J, 1992. "A Cointegration Analysis of Treasury Bill Yields," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 116-26, February.
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    Cited by:
    1. Erdem, Ergin & Shi, Jing, 2011. "ARMA based approaches for forecasting the tuple of wind speed and direction," Applied Energy, Elsevier, vol. 88(4), pages 1405-1414, April.

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