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Term structure forecasting using macro factors and forecast combination

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  • Michiel de Pooter

    ()
    (Federal Reserve Board)

  • Francesco Ravazzolo

    ()
    (Norges Bank (Central Bank of Norway))

  • Dick van Dijk

    ()
    (Erasmus University, Rotterdam)

Abstract

We examine the importance of incorporating macroeconomic information and, in particular, accounting for model uncertainty when forecasting the term structure of U.S.interest rates. We start off by analyzing and comparing the forecast performance of several individual term structure models. Our results confirm and extend results found in previous literature that adding macroeconomic information, through factors extracted from a large number of individual series, tends to improve interest rate forecasts. We then show, however, that the predictive power of individual models varies over time significantly. Models with macro factors are the more accurate in and around recession periods. Models without macro factors do particularly well in low-volatility subperiods such as the late 1990s. We demonstrate that this problem of model uncertainty can be mitigated by combining individual model forecasts. Combining forecasts leads to encouraging gains in predictability, especially for longer-dated maturities, and importantly, these gains are consistent over time.

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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2010/01.

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Length: 47 pages
Date of creation: 01 Mar 2010
Date of revision:
Handle: RePEc:bno:worpap:2010_01

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Related research

Keywords: Term structure of interest rates; Nelson-Siegel model; Affine term structure model; macro factors; forecast combination; Model Confidence Set;

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Cited by:
  1. Christian Kascha & Carsten Trenkler, 2011. "Cointegrated VARMA models and forecasting US interest rates," ECON - Working Papers 033, Department of Economics - University of Zurich.
  2. Eran Raviv, 2013. "Prediction Bias Correction for Dynamic Term Structure Models," Tinbergen Institute Discussion Papers 13-041/III, Tinbergen Institute.
  3. Dick van Dijk & Siem Jan Koopman & Michel van der Wel & Jonathan H. Wright, 2012. "Forecasting Interest Rates with Shifting Endpoints," Tinbergen Institute Discussion Papers 12-076/4, Tinbergen Institute.
  4. Andrea Monticini & Francesco Ravazzolo, 2011. "Forecasting the intraday market price of money," Working Paper 2011/06, Norges Bank.
  5. Dick van Dijk & Siem Jan Koopman & Michel van der Wel & Jonathan H. Wright, 2012. "Forecasting Interest Rates with Shifting Endpoints," Tinbergen Institute Discussion Papers 12-076/4, Tinbergen Institute.
  6. Eran Raviv, 2013. "Prediction Bias Correction for Dynamic Term Structure Models," Tinbergen Institute Discussion Papers 13-041/III, Tinbergen Institute.

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