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The forecasting power of internal yield curve linkages

Author

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  • Nikolaou, Kleopatra
  • Modugno, Michele

Abstract

This paper investigates whether information from foreign yield curves helps forecast domestic yield curves out-of-sample. A nested methodology to forecast yield curves in domestic and international settings is applied on three major countries (the US, Germany and the UK). This novel methodology is based on dynamic factor models, the EM algorithm and the Kalman filter. The domestic model is compared vis-á-vis an international one, where information from foreign yield curves is allowed to enrich the information set of the domestic yield curve. The results have interesting and original implications. They reveal clear international dependency patterns, strong enough to improve forecasts of Germany and to a lesser extent UK. The US yield curve exhibits a more independent behaviour. In this way, the paper also generalizes anecdotal evidence on international interest rate linkages to the whole yield curve. JEL Classification: F31

Suggested Citation

  • Nikolaou, Kleopatra & Modugno, Michele, 2009. "The forecasting power of internal yield curve linkages," Working Paper Series 1044, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20091044
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    File URL: https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1044.pdf
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    References listed on IDEAS

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    Cited by:

    1. repec:ijc:ijcjou:y:2018:q:1:a:7 is not listed on IDEAS
    2. Mirko Abbritti & Salvatore Dell’Erba & Antonio Moreno & Sergio Sola, 2018. "Global Factors in the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(2), pages 301-340, March.
    3. Penikas, Henry, 2008. "Forecasting for the Bank's Asset-Liability Management," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 12(4), pages 3-26.

    More about this item

    Keywords

    dynamic factor model; EM algorithm; international linkages; Yield curve forecast;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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