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Parsimonious modeling and forecasting of corporate yield curve

  • Wei-Choun Yu

    (Economics and Finance Department, Winona State University, Winona, Minnesota, USA)

  • Donald M. Salyards

    (Economics and Finance Department, Winona State University, Winona, Minnesota, USA)

This paper investigates the sensitivity of out-of-sample forecasting performance over a span of different parameters of l in the dynamic Nelson-Siegel three-factor AR(1) model. First, we find that the ad hoc selection of l is not optimal. Second, we find a substantial difference in factor dynamics between investment-grade and speculative-grade corporate bonds from 1994:12 to 2006: 4. Third, we suggest that the three-factor model is sufficient to explain the main variations of corporate yield changes. Finally, the parsimonious Nelson-Siegel three-factor AR(1) model remains competitive in the out-of-sample forecasting of corporate yields. Copyright © 2008 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 28 (2009)
Issue (Month): 1 ()
Pages: 73-88

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Handle: RePEc:jof:jforec:v:28:y:2009:i:1:p:73-88
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