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Data-Driven Duration Management -- Term Structure Forecasting Using Machine Learning

Author

Listed:
  • Tobias Lausser
  • Joao Eduardo Vuolo
  • Rudi Zagst

Abstract

This paper compares different methods for forecasting the term structure of U.S. and European zero-coupon government bonds using both traditional econometric and Machine Learning (ML) approaches. We compare classical models (e.g., Dynamic Nelson-Siegel (DNS) and Principal Component Analysis (PCA)) with different Neural Network (NN) architectures, including those inspired by the classical models, on the U.S. Treasury market and bonds issued by the European Central Bank (ECB). To enhance predictive performance, macroeconomic variables are incorporated. The findings for both markets are separately analyzed and compared. To this end, we propose a robust model evaluation framework combining statistical accuracy metrics - such as RMSE, MAE, and directional accuracy - with the economic relevance of a quantitative bond trading strategy. Results show that NNs consistently outperform traditional models in both forecasting accuracy and portfolio performance. For the U.S., the most effective approach is a direct-forecasting NN that incorporates DNS factors to reduce the dimensionality of zero-rate data and an Autoencoder (AE) to extract macroeconomic features, while for Europe, the optimal model is a factor-based NN using PCA-derived zero-rate factors without the integration of macroeconomic variables. Overall, the paper demonstrates how combining traditional modeling approaches with modern ML techniques and evaluation can improve yield curve forecasts and support applications in fixed-income portfolio construction.

Suggested Citation

  • Tobias Lausser & Joao Eduardo Vuolo & Rudi Zagst, 2026. "Data-Driven Duration Management -- Term Structure Forecasting Using Machine Learning," Papers 2606.26815, arXiv.org.
  • Handle: RePEc:arx:papers:2606.26815
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    References listed on IDEAS

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