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Term Structure Forecasting: No-arbitrage Restrictions Versus Large Information set

Carlo Favero (), Linlin Niu () and Luca Sala ()

No 2013-10-14, Working Papers from Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

Abstract: This paper addresses the issue of forecasting the term structure. We provide a unified state-space modelling framework that encompasses different existing discrete-time yield curve models. Within such framework we analyze the impact of two modelling choices, namely the imposition of no-arbitrage restrictions and the size of the information set used to extract factors, on the forecasting performance. Using US yield curve data, we find that both no-arbitrage and large info help in forecasting but no model uniformly dominates the other. No-arbitrage models are more useful at shorter horizon for shorter maturities. Large information sets are more useful at longer horizons and longer maturities. We also find evidence for a significant feedback from yield curve models to macroeconomic variables that could be exploited for macroeconomic forecasting.

Keywords: Yield curve; term structure of interest rates; forecasting; large data set; factor models (search for similar items in EconPapers)
JEL-codes: C33 C53 E43 E44 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for and nep-mac
Date: 2013-10-14
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Related works:
Journal Article: Term Structure Forecasting: No‐Arbitrage Restrictions versus Large Information Set (2012)
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