Forecasting the Yield Curve for Brazil

Daniel Cajueiro, Jose Angelo Divino and Benjamin Tabak

No 197, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: In this paper, the recent Functional Signal Plus Noise - Equilibrium Correction Model (FSN-ECM) developed in Bowsher and Meeks (2008) and the model developed by Diebold and Li (2006) (DL) are applied to forecasting 12-dimensional yields for Brazil at the one, three, six, and twelve months ahead horizons. Empirical results suggest that the FSN-ECM produces very good forecasts at the short-term (one month) outperforming both the DL and random walk benchmarks. However, the DL model produces better forecasts at the long-term. These results suggest that different models may be used to forecast the yield curve, depending on the forecasting horizon. If our concern is on long-term forecasts as it is usual for institutional investors, then the DL model should be preferred. Keywords: Yield Curve, Forecast, Emerging Markets, Interest Rates

Date: 2009-11
New Economics Papers: this item is included in nep-fmk and nep-for
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