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Forecasting the yield curve: art or science?

Author

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  • Molenaars, Tomas K.
  • Reinerink, Nick H.
  • Hemminga, Marcus A.

Abstract

The objective of our work is to analyze the forecast performance of the dynamic Nelson-Siegel yield curve model and, for comparison, the first order autoregressive (AR(1)) model applied to a set of US bond yield data that covers a large timespan from November 1971 to December 2008. As a reference we take the random walk model applied to the yield data. For our analysis, we make use of a simple parameter representing the relative forecast performance to compare forecasting results of different methods. Our findings indicate that none of the yield curve models convincingly beats the random walk model. Furthermore, our results show that deriving conclusions on basis of model testing for a limited time period is inadequate.

Suggested Citation

  • Molenaars, Tomas K. & Reinerink, Nick H. & Hemminga, Marcus A., 2015. "Forecasting the yield curve: art or science?," MPRA Paper 61917, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:61917
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    References listed on IDEAS

    as
    1. Jens H. E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2009. "An arbitrage-free generalized Nelson--Siegel term structure model," Econometrics Journal, Royal Economic Society, vol. 12(3), pages 33-64, November.
    2. Bank for International Settlements, 2005. "Zero-coupon yield curves: technical documentation," BIS Papers, Bank for International Settlements, number 25.
    3. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    4. Manfred Gilli & Stefan Große & Enrico Schumann, 2010. "Calibrating the Nelson–Siegel–Svensson model," Working Papers 031, COMISEF.
    5. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    6. Michiel De Pooter, 2007. "Examining the Nelson-Siegel Class of Term Structure Models," Tinbergen Institute Discussion Papers 07-043/4, Tinbergen Institute.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Term structure of interest rates; Yield curve modeling; Dynamic Nelson-Siegel model; Out-of-sample forecasting evaluations.;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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