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Forecasting the Yield Curve in a Data‐Rich Environment Using the Factor‐Augmented Nelson–Siegel Model

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  • Peter Exterkate
  • Dick Van Dijk
  • Christiaan Heij
  • Patrick J. F. Groenen

Abstract

Various ways of extracting macroeconomic information from a data-rich environment are compared with the objective of forecasting yield curves using the Nelson-Siegel model. Five issues in factor extraction are addressed, namely, selection of a subset of the available information, incorporation of the forecast objective in constructing factors, specification of a multivariate forecast objective, data grouping before constructing factors, and selection of the number of factors in a data-driven way. Our empirical results show that each of these features helps to improve forecast accuracy, especially for the shortest and longest maturities. The data-driven methods perform well in relatively volatile periods, when simpler models do not suffice.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 32 (2013)
Issue (Month): 3 (04)
Pages: 193-214

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Handle: RePEc:wly:jforec:v:32:y:2013:i:3:p:193-214

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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References

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  1. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
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Cited by:
  1. Michele Manna & Emmanuela Bernardini & Mauro Bufano & Davide Dottori, 2013. "Modelling public debt strategies," Questioni di Economia e Finanza (Occasional Papers), Bank of Italy, Economic Research and International Relations Area 199, Bank of Italy, Economic Research and International Relations Area.
  2. Koopman, Siem Jan & van der Wel, Michel, 2013. "Forecasting the US term structure of interest rates using a macroeconomic smooth dynamic factor model," International Journal of Forecasting, Elsevier, Elsevier, vol. 29(4), pages 676-694.
  3. Koopman, Siem Jan & Lucas, André & Schwaab, Bernd, 2011. "Modeling frailty-correlated defaults using many macroeconomic covariates," Journal of Econometrics, Elsevier, Elsevier, vol. 162(2), pages 312-325, June.
  4. Caio Almeida & Axel Simonsen & José Vicente, 2012. "Forecasting Bond Yields with Segmented Term Structure Models," Working Papers Series, Central Bank of Brazil, Research Department 288, Central Bank of Brazil, Research Department.

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