Forecasting the term structure of the Euro Market using Principal Component Analysis

Alexander Dauwe and Marcelo L. Moura

No 135, Business and Economics Working Papers from Unidade de Negocios e Economia, Insper

Abstract: We forecast the monthly Euro Interest Rate Swap Curve with an autoregressive principal component model. We compare its predictability accuracy against the Diebold and Li’s dynamic Nelson Siegel, the auto-regressive direct regression of the yield levels and the random walk model. After a robust set of specifications and regression windows, we conclude that our proposed model achieve forecasts that significantly outperform the competitor models, mainly for short run horizons.

Pages: 23 pages
Date: 2011
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