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Forecasting the Yield Curve for the Euro Region

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  • Benjamin M. Tabak
  • Daniel O. Cajueiro
  • Alexandre B. Sollaci

Abstract

This paper compares the forecast precision of the Functional Signal plus Noise (FSN), the Dynamic Nelson-Siegel (DL), and a random walk model. The empirical results suggest that both outperform the random walk at short horizons (one-month) and that the the FSN model outperforms the DL at the one-month forecasting horizon. The conclusions provided in this paper are important for policy makers, fixed income portfolio managers, financial institutions and academics.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps247.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 247.

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Date of creation: Aug 2011
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Handle: RePEc:bcb:wpaper:247

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Web page: http://www.bcb.gov.br/?english

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  1. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  2. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
  3. Clive G. Bowsher & Roland Meeks, 2008. "The Dynamics of Economic Functions: Modelling and Forecasting the Yield Curve," Economics Series Working Papers 2008-WO5, University of Oxford, Department of Economics.
  4. Vicente, José & Tabak, Benjamin M., 2008. "Forecasting bond yields in the Brazilian fixed income market," International Journal of Forecasting, Elsevier, vol. 24(3), pages 490-497.
  5. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
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