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Forecasting Yield Curves Using Analyst's Views

Author

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  • Leonardo Nogueira

    (ICMA Centre, University of Reading and Banco Central do Brasil)

Abstract

Fixed income analysts are accustomed to monitoring a few benchmark yields on a continuous basis and to providing point estimates for these yields, or for a combination of them. Yet, the optimisation of fixed income portfolios requires an accurate forecast of not only a few benchmark yields, but of complete yield curves. This paper derives a forecast of one or more yield curves that is consistent with an analyst's views. The model is based on a novel application of principal component analysis (PCA). It can be extended to other markets and has no restrictions on the number of forecast variables, or the number of analyst's views. We consider examples of forecasting the government bond yield curves of the United States, the Eurozone and the United Kingdom, simultaneously or not. Our results have direct implications for portfolio management.

Suggested Citation

  • Leonardo Nogueira, 2009. "Forecasting Yield Curves Using Analyst's Views," ICMA Centre Discussion Papers in Finance icma-dp2009-03, Henley Business School, University of Reading.
    • Handle: RePEc:rdg:icmadp:icma-dp2009-03
    as

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    More about this item

    Keywords

    Yield curves; forecasting models; scenario analysis; principal component analysis.;
    All these keywords.

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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