Forecasting the yield curve in a data-rich environment: A no-arbitrage factor-augmented VAR approach

Emanuel Moench

Journal of Econometrics, 2008, vol. 146, issue 1, 26-43

Abstract: This paper suggests a term structure model which parsimoniously exploits a broad macroeconomic information set. The model uses the short rate and the common components of a large number of macroeconomic variables as factors. Precisely, the dynamics of the short rate are modeled with a Factor-Augmented Vector Autoregression and the term structure is derived using parameter restrictions implied by no-arbitrage. The model has economic appeal and provides better out-of-sample yield forecasts at intermediate and long horizons than a number of previously suggested approaches. The forecast improvement is highly significant and particularly pronounced for short and medium-term maturities.

Keywords: Yield; curve; Factor-augmented; VAR; Affine; term; structure; models; Dynamic; factor; models; Forecasting (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (100)

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Working Paper: Forecasting the yield curve in a data-rich environment: a no-arbitrage factor-augmented VAR approach (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:146:y:2008:i:1:p:26-43

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