Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty

Joseph Byrne, Shuo Cao and Dimitris Korobilis

Essex Finance Centre Working Papers from University of Essex, Essex Business School

Abstract: This paper models and predicts the term structure of US interest rates in a data rich environment. We allow the model dimension and parameters to change over time, accounting for model uncertainty and sudden structural changes. The proposed time-varying parameter Nelson-Siegel Dynamic Model Averaging (DMA) predicts yields better than standard benchmarks. DMA performs better since it incorporates more macro-finance information during recessions. The proposed method allows us to estimate plausible real-time term premia, whose countercyclicality weakened during the financial crisis.

Keywords: Term Structure of Interest Rates; Nelson-Siegel; Dynamic Model Averaging; Bayesian Methods; Term Premia (search for similar items in EconPapers)
Date: 2016-08
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty (2015)
Working Paper: Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty (2015)
Working Paper: Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:esy:uefcwp:18195

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