Parsimonious modeling and forecasting of corporate yield curve
Article first published online: 5 SEP 2008
Copyright © 2008 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 28, Issue 1, pages 73–88, January 2009
How to Cite
Yu, W.-C. and Salyards, D. M. (2009), Parsimonious modeling and forecasting of corporate yield curve. J. Forecast., 28: 73–88. doi: 10.1002/for.1092
- Issue published online: 10 DEC 2008
- Article first published online: 5 SEP 2008
- corporate yield curve;
- Nelson–Siegel model;
- three-factor model;
This paper investigates the sensitivity of out-of-sample forecasting performance over a span of different parameters of l in the dynamic Nelson–Siegel three-factor AR(1) model. First, we find that the ad hoc selection of l is not optimal. Second, we find a substantial difference in factor dynamics between investment-grade and speculative-grade corporate bonds from 1994:12 to 2006: 4. Third, we suggest that the three-factor model is sufficient to explain the main variations of corporate yield changes. Finally, the parsimonious Nelson–Siegel three-factor AR(1) model remains competitive in the out-of-sample forecasting of corporate yields. Copyright © 2008 John Wiley & Sons, Ltd.