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Forecasting the term structures of Treasury and corporate yields using dynamic Nelson-Siegel models

  • Yu, Wei-Choun
  • Zivot, Eric

We extend Diebold and Li’s dynamic Nelson-Siegel three-factor model to a broader empirical prospective by including the evaluation of the state space approach and by using nine different ratings for corporate bonds. We find that the dynamic Nelson-Siegel factor AR(1) model outperforms other competitors on the out-of-sample forecast accuracy, especially on the investment-grade bonds for the short-term forecast horizon and on the high-yield bonds for the long-term forecast horizon. The dynamic Nelson-Siegel factor state space model, however, becomes appealing on the high-yield bonds in the short-term forecast horizon, where the factor dynamics are more likely time-varying and parameter instability is more probable in the model specification.

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Article provided by Elsevier in its journal International Journal of Forecasting.

Volume (Year): 27 (2011)
Issue (Month): 2 ()
Pages: 579-591

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Handle: RePEc:eee:intfor:v:27:y:2011:i:2:p:579-591
Contact details of provider: Web page: http://www.elsevier.com/locate/ijforecast

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  1. Hans Dewachter & Marco Lyrio, 2003. "Macro Factors and the Term Structure of Interest Rates," International Economics Working Papers Series ces0304, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
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  7. Francis X. Diebold & Canlin Li, 2003. "Forecasting the Term Structure of Government Bond Yields," NBER Working Papers 10048, National Bureau of Economic Research, Inc.
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  12. Sydney C. Ludvigson & Serena Ng, 2009. "Macro Factors in Bond Risk Premia," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5027-5067, December.
  13. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
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  15. Richard Cantor & Frank Packer, 1996. "Determinants and impacts of sovereign credit ratings," Research Paper 9608, Federal Reserve Bank of New York.
  16. Wei-Choun Yu & Donald M. Salyards, 2009. "Parsimonious modeling and forecasting of corporate yield curve," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(1), pages 73-88.
  17. Durbin, James & Koopman, Siem Jan, 2001. "Time Series Analysis by State Space Methods," OUP Catalogue, Oxford University Press, number 9780198523543, May.
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