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Estimating and Forecasting the Yield Curve Using a Markov Switching Dynamic Nelson and Siegel Model

  • Martin Gonzalez-Rozada

    ()

  • Martin sola

    ()

  • Constantino Hevia

    ()

  • Fabio Spagnolo

    ()

In this paper we estimate the yield curve of U.S. government bonds using a Markov switching latent variable model. We show how measures such as the level, slope, and curvature of the yield curve are a�ected by business cycle conditions. We present a switching latent model which not only seem to capture this features in sample but also performs well out of sample.

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File URL: http://utdt.edu/download.php?fname=_134920718375682100.pdf
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Paper provided by Universidad Torcuato Di Tella in its series Department of Economics Working Papers with number 2012-07.

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Length: 47 pages
Date of creation: Jul 2012
Date of revision:
Handle: RePEc:udt:wpecon:2012-07
Contact details of provider: Web page: http://www.utdt.edu/ver_contenido.php?id_contenido=439&id_item_menu=568

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  1. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
  2. Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
  3. Zacharias Psaradakis & Nicola Spagnolo, 2002. "On the Determination of the Number of Regimes in Markov-Switching Autoregressive Models," Computing in Economics and Finance 2002 83, Society for Computational Economics.
  4. Laura Coroneo & Domenico Giannone & Michèle Modugno, 2013. "Unspanned Macroeconomic Factors in the Yields Curve," Working Papers ECARES ECARES 2013-07, ULB -- Universite Libre de Bruxelles.
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  7. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
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  9. McAfee, R. Preston & McMillan, John, 1989. "Government procurement and international trade," Journal of International Economics, Elsevier, vol. 26(3-4), pages 291-308, May.
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  13. Coroneo, Laura & Nyholm, Ken & Vidova-Koleva, Rositsa, 2008. "How arbitrage-free is the Nelson-Siegel Model?," Working Paper Series 0874, European Central Bank.
  14. Roberto Burguet & Martin K. Perry, 2008. "Preferred Suppliers in Auction Markets," UFAE and IAE Working Papers 752.08, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
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  16. Yu, Wei-Choun & Zivot, Eric, 2011. "Forecasting the term structures of Treasury and corporate yields using dynamic Nelson-Siegel models," International Journal of Forecasting, Elsevier, vol. 27(2), pages 579-591.
  17. Ravi Bansal & Hao Zhou, 2002. "Term Structure of Interest Rates with Regime Shifts," Journal of Finance, American Finance Association, vol. 57(5), pages 1997-2043, October.
  18. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
  19. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
  20. Driffill John & Kenc Turalay & Sola Martin & Spagnolo Fabio, 2009. "The Effects of Different Parameterizations of Markov-Switching in a CIR Model of Bond Pricing," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 13(1), pages 1-24, March.
  21. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  22. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Auction design and favoritism," International Journal of Industrial Organization, Elsevier, vol. 9(1), pages 9-42, March.
  23. Mikhail Chernov & Ruslan Bikbov, 2009. "Monetary Policy Regimes and the Term Structure of Interest Rates," 2009 Meeting Papers 334, Society for Economic Dynamics.
  24. Leandro Arozamena & Federico Weinschelbaum, 2010. "On favoritism in auctions with entry," Department of Economics Working Papers 2010-072, Universidad Torcuato Di Tella.
  25. Federico Weinschelbaum & Leandro Arozamena, 2006. "A Note on the Suboptimality of Right-of-First-Refusal Clauses," Working Papers 92, Universidad de San Andres, Departamento de Economia, revised Jul 2006.
  26. Naegelen, Florence & Mougeot, Michel, 1998. "Discriminatory public procurement policy and cost reduction incentives," Journal of Public Economics, Elsevier, vol. 67(3), pages 349-367, March.
  27. Ju Xiang & Xiaoneng Zhu, 2013. "A Regime-Switching Nelson--Siegel Term Structure Model and Interest Rate Forecasts," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 11(3), pages 522-555, June.
  28. Koopman, Siem Jan & Mallee, Max I. P. & Van der Wel, Michel, 2010. "Analyzing the Term Structure of Interest Rates Using the Dynamic Nelson–Siegel Model With Time-Varying Parameters," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(3), pages 329-343.
  29. Vagstad, Steinar, 1995. "Promoting fair competition in public procurement," Journal of Public Economics, Elsevier, vol. 58(2), pages 283-307, October.
  30. 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.
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