Forecasting the Yield Curve with Linear Factor Models

Marco Matsumura, Ajax Moreira and José Valentim Vicente

No 223, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: In this work we compare the interest rate forecasting performance using a broad class of linear models. The models are estimated through a MCMC procedure with data from the US and Brazilian markets. We show that a simple parametric specification has the best predictive power, but it does not outperform the random walk. We also find that macroeconomic variables and no-arbitrage conditions have little effect to improve the out-of-sample fit, while a financial variable (stock index) increases the forecasting accuracy.

Date: 2010-11
New Economics Papers: this item is included in nep-for
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