Yield Curve Forecasts and the Predictive Power of Macro Variables in a VAR Framework

Luciano Vereda, Hélio Lopes, Jessica Kubrusly, Adrian Pizzinga () and Taofik Mohammed Ibrahim
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Adrian Pizzinga: Department of Statistics, Institute of Mathematics and Statistics, Fluminense Federal University, Brasil
Authors registered in the RePEc Author Service: Luciano Vereda Oliveira

Journal of Reviews on Global Economics, 2014, vol. 3, 377-393

Abstract: Recent macro-finance papers have documented the importance of adding information from macro variables in order to improve out-of-sample forecasting performance of bond yields. This paper aims at investigating the reasons for this success. We use Diebold and Li’s dynamic version of the Nelson and Siegel exponential approximation of the yield curve to estimate the factors that govern its dynamics. Factors and macro variables are modeled simultaneously in a VAR framework, which is then used to forecast the factors. Our main conclusions are (i) this framework is useful in forecasting slope and curvature factors, but not the level factor; and (ii) to get good results in forecasting the level factor, one needs a macro model which incorporates variables related to long-run trends and expectations.

Keywords: Macroeconomic variables; Nelson and Siegel curve; term structure of interest rates; VAR models; yield curve (search for similar items in EconPapers)
JEL-codes: C53 E43 G12 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:lif:jrgelg:v:3:y:2014:p:377-393

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