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The Ex Ante Predictive Accuracy of Alternative Models of the Term Structure of Interest Rates

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  • Basma Bekdache

    (Wayne State University)

  • Christopher F. Baum

    (Boston College)

Abstract

This paper compares six term structure estimation methods empirically in terms of zero and forward rate curves as well as ex ante price and yield prediction accuracy. Specifically, we use daily government bond quotations to generate true out-of-sample prediction errors based on the model's ability to price bonds for one to five trading days ahead. Using several criteria, we find that the models' performance differs markedly between in- and out-of-sample predictions. Particularly, models with relatively smooth yield and forward rate curves do not perform well in sample but produce the best out-of-sample forecasts. Given that the estimation methods vary in computational complexity and parsimony, we examine the degree of loss in accuracy the modeler incurs by not using the best method. Of particular interest is the comparison between the more complex splining methods and the parsimonious Nelson-Siegel model estimated from Treasury STRIPS with only three parameters. Finally, we examine the models' performance in various maturity ranges which may be of interest to various types of investors.

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 1997 with number 72.

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Handle: RePEc:sce:scecf7:72

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Postal: CEF97, Stanford University, Department of Economics, Stanford CA USA
Web page: http://bucky.stanford.edu/cef97/
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  1. Brennan, Michael J. & Schwartz, Eduardo S., 1979. "A continuous time approach to the pricing of bonds," Journal of Banking & Finance, Elsevier, vol. 3(2), pages 133-155, July.
  2. Stephen G. Cecchetti, 1987. "The Case of the Negative Nominal Interest Rates: New Estimates of the Term Structure of Interest Rates During the Great Depression," NBER Working Papers 2472, National Bureau of Economic Research, Inc.
  3. Shea, Gary S., 1984. "Pitfalls in Smoothing Interest Rate Term Structure Data: Equilibrium Models and Spline Approximations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(03), pages 253-269, September.
  4. Carleton, Willard T & Cooper, Ian A, 1976. "Estimation and Uses of the Term Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 31(4), pages 1067-83, September.
  5. Michael J. Brennan and Eduardo S. Schwartz., 1979. "A Continuous-Time Approach to the Pricing of Bonds," Research Program in Finance Working Papers 85, University of California at Berkeley.
  6. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  7. McCulloch, J Huston, 1971. "Measuring the Term Structure of Interest Rates," The Journal of Business, University of Chicago Press, vol. 44(1), pages 19-31, January.
  8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
  9. 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.
  10. Duffie, Darrell, 1996. " Special Repo Rates," Journal of Finance, American Finance Association, vol. 51(2), pages 493-526, June.
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Cited by:
  1. Andraž, Grum, 2006. "Razvitost slovenskega trga dolžniškega kapitala in ocenitev krivulje donosnosti," MPRA Paper 4876, University Library of Munich, Germany.

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