CONSISTENT YIELD CURVE PREDICTION

Josef Teichmann and Mario V. Wüthrich

ASTIN Bulletin, 2016, vol. 46, issue 2, 191-224

Abstract: We present an arbitrage-free non-parametric yield curve prediction model which takes the full discretized yield curve data as input state variable. Absence of arbitrage is a particularly important model feature for prediction models in case of highly correlated data as, for instance, interest rates. Furthermore, the model structure allows to separate constructing the daily yield curve from estimating its volatility structure and from calibrating the market prices of risk. The empirical part includes tests on modeling assumptions, out-of-sample back-testing and a comparison with the Vasiček (1977) short-rate model.

Date: 2016
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