The forecasting power of internal yield curve linkages

Kleopatra Nikolaou and Michele Modugno

No 1044, Working Paper Series from European Central Bank

Abstract: This paper investigates whether information from foreign yield curves helps forecast domestic yield curves out-of-sample. A nested methodology to forecast yield curves in domestic and international settings is applied on three major countries (the US, Germany and the UK). This novel methodology is based on dynamic factor models, the EM algorithm and the Kalman filter. The domestic model is compared vis-á-vis an international one, where information from foreign yield curves is allowed to enrich the information set of the domestic yield curve. The results have interesting and original implications. They reveal clear international dependency patterns, strong enough to improve forecasts of Germany and to a lesser extent UK. The US yield curve exhibits a more independent behaviour. In this way, the paper also generalizes anecdotal evidence on international interest rate linkages to the whole yield curve. JEL Classification: F31

Keywords: dynamic factor model; EM algorithm; international linkages; Yield curve forecast (search for similar items in EconPapers)
Date: 2009-04
New Economics Papers: this item is included in nep-ecm and nep-for
Note: 3561872
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091044

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