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Forecasting the term structure of the Euro Market using Principal Component Analysis

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  • Alexander Dauwe
  • Marcelo L. Moura

Abstract

We forecast the monthly Euro Interest Rate Swap Curve with an autoregressive principal component model. We compare its predictability accuracy against the Diebold and Li’s dynamic Nelson Siegel, the auto-regressive direct regression of the yield levels and the random walk model. After a robust set of specifications and regression windows, we conclude that our proposed model achieve forecasts that significantly outperform the competitor models, mainly for short run horizons.

Suggested Citation

  • Alexander Dauwe & Marcelo L. Moura, 2011. "Forecasting the term structure of the Euro Market using Principal Component Analysis," Business and Economics Working Papers 135, Unidade de Negocios e Economia, Insper.
    • Handle: RePEc:aap:wpaper:135
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