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Forecasting The Yield Curve With The Arbitrage-Free Dynamic Nelson-Siegel Model: Brazilian Evidence

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  • FABRICIO TOURRUCÔO
  • JOÃO F. CALDEIRA
  • GUILHERME V. MOURA
  • ANDRÉ A. P. SANTOS

Abstract

We assess the extent to which the imposition of a no-arbitrage restriction on the dynamic Nelson-Siegel model helps obtaining more accurate forecasts ofthe term structure. Forthat purpose, we provide an empirical application based on a large panel ofBrazilian interestrate future contracts and testfor differencesin forecasting performance among alternative benchmark specificationsincluding the random walk, vector autoregressions, and the dynamic Nelson-Siegel. We show empirically that the arbitrage-free Nelson-Siegel model is able to outperform all other benchmark models when longer forecasting horizons are taken into account.
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Suggested Citation

  • Fabricio Tourrucôo & João F. Caldeira & Guilherme V. Moura & André A. P. Santos, 2016. "Forecasting The Yield Curve With The Arbitrage-Free Dynamic Nelson-Siegel Model: Brazilian Evidence," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    • Handle: RePEc:anp:en2014:028
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    3. Eduardo Mineo & Airlane Pereira Alencar & Marcelo Moura & Antonio Elias Fabris, 2020. "Forecasting the Term Structure of Interest Rates with Dynamic Constrained Smoothing B-Splines," JRFM, MDPI, vol. 13(4), pages 1-14, April.

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