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Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty

Joseph Byrne (), Shuo Cao and Dimitris Korobilis

Working Papers from Business School - Economics, University of Glasgow

Abstract: This paper extends the Nelson-Siegel linear factor model by developing a flexible macro-finance framework for modeling and forecasting the term structure of US interest rates. Our approach is robust to parameter uncertainty and structural change, as we consider instabilities in parameters and volatilities, and our model averaging method allows for investors’ model uncertainty over time. Our time-varying parameter Nelson-Siegel Dynamic Model Averaging (NS-DMA) predicts yields better than standard benchmarks and successfully captures plausible time-varying term premia in real time. The proposed model has significant in-sample and out-of-sample predictability for excess bond returns, and the predictability is of economic value.

Keywords: Term Structure of Interest Rates; Nelson-Siegel; Dynamic Model Averaging; Bayesian Methods; Term Premia. (search for similar items in EconPapers)
JEL-codes: C32 C52 E43 E47 G17 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-ore
Date: 2015-02
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Related works:
Working Paper: Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty (2016) Downloads
Working Paper: Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty (2015) Downloads
Working Paper: Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty (2015) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2015_08

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