Parsimonious modeling and forecasting of corporate yield curve

Wei-Choun Yu () and Donald M. Salyards
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Donald M. Salyards: Economics and Finance Department, Winona State University, Winona, Minnesota, USA, Postal: Economics and Finance Department, Winona State University, Winona, Minnesota, USA

Journal of Forecasting, 2009, vol. 28, issue 1, 73-88

Abstract: This paper investigates the sensitivity of out-of-sample forecasting performance over a span of different parameters of l in the dynamic Nelson-Siegel three-factor AR(1) model. First, we find that the ad hoc selection of l is not optimal. Second, we find a substantial difference in factor dynamics between investment-grade and speculative-grade corporate bonds from 1994:12 to 2006: 4. Third, we suggest that the three-factor model is sufficient to explain the main variations of corporate yield changes. Finally, the parsimonious Nelson-Siegel three-factor AR(1) model remains competitive in the out-of-sample forecasting of corporate yields. Copyright © 2008 John Wiley & Sons, Ltd.

Date: 2009
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:jof:jforec:v:28:y:2009:i:1:p:73-88

DOI: 10.1002/for.1092

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