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Forecasting the Yield Curve with Dynamic Factors

Author

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  • Erhard RESCHENHOFER

    (University of Vienna, Department of Statistics and Operations Research, Oskar-Morgenstern-Platz 1, 1090 Vienna, Austria.)

  • Thomas STARK

    (University of Vienna, Department of Statistics and Operations Research, Oskar-Morgenstern-Platz 1, 1090 Vienna, Austria)

Abstract

Using two monthly yield datasets over the periods 1970-2000 and 1990-2019, respectively, we re-examine previous findings that yield forecasts based on AR models for the dynamic factors obtained from the Nelson-Siegel curve outperform the random walk forecast and other competitors. Our empirical results do not support these findings. Only the forecasts based on AR models for the differenced yields outperform the random walk forecast. In general, the 1-month-ahead forecasts based on the dynamic factors come out worse than those based on the yields. In the case of 12-months-ahead forecasting, all forecasts perform poorly, particularly those based on AR models fitted to undifferenced time series. Seemingly more positive results obtained in previous studies are explained by a focus on a too short evaluation period.

Suggested Citation

  • Erhard RESCHENHOFER & Thomas STARK, 2019. "Forecasting the Yield Curve with Dynamic Factors," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 101-113, March.
    • Handle: RePEc:rjr:romjef:v::y:2019:i:1:p:101-113
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    Cited by:

    1. Karam KIM & Doojin RYU, 2020. "Predictive ability of investor sentiment for the stock market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 33-46, December.

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    More about this item

    Keywords

    Nelson-Siegel curve; term structure; dynamic factors; out-of-sample forecasting; random walk benchmark; long-term forecasting;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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