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Forecasting the yield curve: A statistical model with market survey data

  • Leite, André Luís
  • Filho, Romeu Braz Pereira Gomes
  • Vicente, José Valentim Machado
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    In this paper we propose a statistical model to forecast the yield curve, using two major sources of information: data from a market survey and the forward rate risk premium. We apply the model to forecast the Brazilian yield curve six months ahead and compare the results with the well-known model of Diebold and Li (2006), a random walk process and the predictions based on the forward rate. The proposed model produces accurate forecasts and outperforms all the competitor models in terms of root mean square error (RMSE).

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    File URL: http://www.sciencedirect.com/science/article/B6W4W-4YC1K96-1/2/6de91f7a42ef40aaa2a3ccd4aeab3c72
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    Article provided by Elsevier in its journal International Review of Financial Analysis.

    Volume (Year): 19 (2010)
    Issue (Month): 2 (March)
    Pages: 108-112

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    Handle: RePEc:eee:finana:v:19:y:2010:i:2:p:108-112
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

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    1. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    2. Francis X. Diebold & Monika Piazzesi & Glenn Rudebusch, 2005. "Modeling Bond Yields in Finance and Macroeconomics," NBER Working Papers 11089, National Bureau of Economic Research, Inc.
    3. Peter Hoerdahl & Oreste Tristani, 2004. "A joint econometric model of macroeconomic and term structure dynamics," Econometric Society 2004 North American Summer Meetings 379, Econometric Society.
    4. Yash P. Mehra, 2002. "Survey measures of expected inflation : revisiting the issues of predictive content and rationality," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 17-36.
    5. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02.
    6. Jose Vicente & Benjamin M. Tabak, 2007. "Forecasting Bonds Yields in the Brazilian Fixed Income Market," Working Papers Series 141, Central Bank of Brazil, Research Department.
    7. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
    8. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March.
    9. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
    10. John Y. Campbell & Robert J. Shiller, 1989. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," NBER Working Papers 3153, National Bureau of Economic Research, Inc.
    11. Caio Almeida & Romeu Gomes & André Leite & Axel Simonsen & José Vicente, 2009. "Does Curvature Enhance Forecasting?," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 12(08), pages 1171-1196.
    12. Andrew Ang & Geert Bekaert & Min Wei, 2005. "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?," NBER Working Papers 11538, National Bureau of Economic Research, Inc.
    13. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    14. Shiller, Robert J. & Huston McCulloch, J., 1990. "The term structure of interest rates," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 13, pages 627-722 Elsevier.
    15. Svensson, L.E.O., 1993. "Monetary Policy with Flexible Exchange Rates and Foreward Interest Rates as Indicators," Papers 559, Stockholm - International Economic Studies.
    16. Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
    17. Eduardo J. A. Lima & Felipe Luduvice & Benjamin M. Tabak, 2006. "Forecasting Interest Rates: an application for Brazil," Working Papers Series 120, Central Bank of Brazil, Research Department.
    18. Jens H.E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2007. "The affine arbitrage-free class of Nelson-Siegel term structure models," Working Paper Series 2007-20, Federal Reserve Bank of San Francisco.
    19. Fabia A. de Carvalho & André Minella, 2009. "Market Forecasts in Brazil: performance and determinants," Working Papers Series 185, Central Bank of Brazil, Research Department.
    20. Huse, Cristian, 2011. "Term structure modelling with observable state variables," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3240-3252.
    21. Almeida, Caio & Vicente, José, 2008. "The role of no-arbitrage on forecasting: Lessons from a parametric term structure model," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2695-2705, December.
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