Forecasting the Term Structure of Government Bond Yields

Francis Diebold and Canlin Li

No 10048, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Despite powerful advances in yield curve modeling in the last twenty years, comparatively little attention has been paid to the key practical problem of forecasting the yield curve. In this paper we do so. We use neither the no-arbitrage approach, which focuses on accurately fitting the cross section of interest rates at any given time but neglects time-series dynamics, nor the equilibrium approach, which focuses on time-series dynamics (primarily those of the instantaneous rate) but pays comparatively little attention to fitting the entire cross section at any given time and has been shown to forecast poorly. Instead, we use variations on the Nelson-Siegel exponential components framework to model the entire yield curve, period-by-period, as a three dimensional parameter evolving dynamically. We show that the three time-varying parameters may be interpreted as factors corresponding to level, slope and curvature, and that they may be estimated with high efficiency. We propose and estimate autoregressive models for the factors, and we show that our models are consistent with a variety of stylized facts regarding the yield curve. We use our models to produce term-structure forecasts at both short and long horizons encouraging results. In particular, our forecasts appear much more accurate at long horizons than various standard benchmark forecasts.

JEL-codes: E4 G1 (search for similar items in EconPapers)
Date: 2003-10
New Economics Papers: this item is included in nep-ets and nep-rmg
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

Published as Diebold, Francis X. and Canlin Li. "Forecasting The Term Structure Of Government Bond Yields," Journal of Econometrics, 2006, v130(2,Feb), 337-364.

Downloads: (external link)
http://www.nber.org/papers/w10048.pdf (application/pdf)

Related works:
Journal Article: Forecasting the term structure of government bond yields (2006)
Working Paper: Forecasting the term structure of government bond yields (2003)
Working Paper: Forecasting the Term Structure of Government Bond Yields (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:10048

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w10048

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().