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Predicting the term structure of interest rates incorporating parameter uncertainty, model uncertainty and macroeconomic information

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  • De Pooter, Michiel
  • Ravazzolo, Francesco
  • van Dijk, Dick

Abstract

We forecast the term structure of U.S. Treasury zero-coupon bond yields by analyzing a range of models that have been used in the literature. We assess the relevance of parameter uncertainty by examining the added value of using Bayesian inference compared to frequentist estimation techniques, and model uncertainty by combining forecasts from individual models. Following current literature we also investigate the benefits of incorporating macroeconomic information in yield curve models. Our results show that adding macroeconomic factors is very beneficial for improving the out-of-sample forecasting performance of individual models. Despite this, the predictive accuracy of models varies over time considerably, irrespective of using the Bayesian or frequentist approach. We show that mitigating model uncertainty by combining forecasts leads to substantial gains in forecasting performance, especially when applying Bayesian model averaging.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2512.

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Date of creation: 06 Nov 2006
Date of revision: 03 Mar 2007
Handle: RePEc:pra:mprapa:2512

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Keywords: Term structure of interest rates; Nelson-Siegel model; Affine term structure model; forecast combination; Bayesian analysis;

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References

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Citations

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Cited by:
  1. Penikas, Henry & Simakova, Varvara, 2009. "Interest Rate Risk Management Based on Copula-GARCH Models," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 13(1), pages 3-36.
  2. Christensen, Jens H.E. & Diebold, Francis X. & Rudebusch, Glenn D., 2011. "The affine arbitrage-free class of Nelson-Siegel term structure models," Journal of Econometrics, Elsevier, vol. 164(1), pages 4-20, September.
  3. Penikas, Henry, 2008. "Forecasting for the Bank's Asset-Liability Management," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 12(4), pages 3-26.
  4. Peter Exterkate & Dick Van Dijk & Christiaan Heij & Patrick J. F. Groenen, 2013. "Forecasting the Yield Curve in a Data‐Rich Environment Using the Factor‐Augmented Nelson–Siegel Model," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 32(3), pages 193-214, 04.
  5. A. Carriero & G. Kapetanios & M. Marcellino, 2010. "Forecasting Government Bond Yields with Large Bayesian VARs," Economics Working Papers ECO2010/17, European University Institute.
  6. Coroneo, Laura & Nyholm, Ken & Vidova-Koleva, Rositsa, 2008. "How arbitrage-free is the Nelson-Siegel Model?," Working Paper Series 0874, European Central Bank.
  7. 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.
  8. David Jamieson Bolder & Yuliya Romanyuk, 2008. "Combining Canadian Interest-Rate Forecasts," Working Papers 08-34, Bank of Canada.
  9. Dauwe, Alexander & Moura, Marcelo L., 2011. "Forecasting the term structure of the Euro Market using Principal Component Analysis," Insper Working Papers wpe_233, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  10. Stephen Hall & Kavita Sirichand, 2010. "Decision-Based Forecast Evaluation of UK Interest Rate Predictability," Discussion Papers in Economics 10/09, Department of Economics, University of Leicester.

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