IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Term Structure Modeling and Forecasting of Government Bond Yields : Does Macroeconomic Factors Imply Better Out-of-Sample Forecasts?

  • Wali Ullah
  • Yasumasa Matsuda
Registered author(s):

    Accurate modeling and precise estimation of the term structure of interest rate are of crucial importance in many areas of finance and macroeconomics as it is the most important factor in the capital market and probably the economy. This study compares the in-sample fit and out-of-sample forecast accuracy of the CIR and Nelson-Siegel models. For the in-sample fit, there is a significant lack of information on the short-term CIR model. The CIR model should also be considered too poor to describe the term structure in a simulation based context. It generates a downward slope average yield curve. Contrary to CIR model, Nelson-Siegel model is not only compatible to fit attractively the yield curve but also accurately forecast the future yield for various maturities. Furthermore, the non-linear version of the Nelson-Siegel model outperforms the linearized one. In a simulation based context the Nelson-Siegel model is capable to replicate most of the stylized facts of the Japanese market yield curve. Therefore, it turns out that the Nelson-Siegel model (non-linear version) could be a good candidate among various alternatives to study the evolution of the yield curve in Japanese market.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    File URL:
    Download Restriction: no

    Paper provided by Graduate School of Economics and Management, Tohoku University in its series TERG Discussion Papers with number 304.

    in new window

    Length: 36 pages
    Date of creation: Oct 2012
    Date of revision:
    Handle: RePEc:toh:tergaa:304
    Contact details of provider: Postal: Kawauchi, Aoba-ku, Sendai 980-8476
    Web page:

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Francis X. Diebold & Canlin Li, 2002. "Forecasting the Term Structure of Government Bond Yields," Center for Financial Institutions Working Papers 02-34, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. 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.
    3. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-92.
    4. Vasicek, Oldrich A & Fong, H Gifford, 1982. " Term Structure Modeling Using Exponential Splines," Journal of Finance, American Finance Association, vol. 37(2), pages 339-48, May.
    5. de Jong, Frank, 1999. "Time-series and Cross-section Information in Affine Term Structure Models," CEPR Discussion Papers 2065, C.E.P.R. Discussion Papers.
    6. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    7. Wali Ullah & Yoshihiko Tsukuda & Yasumasa Matsuda, 2012. "Term Structure Forecasting of Government Bond Yields with Latent and Macroeconomic Factors: Does Macroeconomic Factors Imply Better Out-of-Sample Forecasts?," TERG Discussion Papers 287, Graduate School of Economics and Management, Tohoku University.
    8. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    9. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September.
    10. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:toh:tergaa:304. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Tohoku University Library)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.