Term Structure Forecasting: No-Arbitrage Restrictions versus Large Information Set
Version of Record online: 21 JUN 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 31, Issue 2, pages 124–156, March 2012
How to Cite
Favero, C. A., Niu, L. and Sala, L. (2012), Term Structure Forecasting: No-Arbitrage Restrictions versus Large Information Set. J. Forecast., 31: 124–156. doi: 10.1002/for.1181
- Issue online: 23 JAN 2012
- Version of Record online: 21 JUN 2010
- yield curve;
- term structure of interest rates;
- large dataset;
- factor models
This paper addresses the issue of forecasting term structure. We provide a unified state-space modeling framework that encompasses different existing discrete-time yield curve models. Within such a framework we analyze the impact of two modeling choices, namely the imposition of no-arbitrage restrictions and the size of the information set used to extract factors, on forecasting performance. Using US yield curve data, we find that both no-arbitrage and large information sets help in forecasting but no model uniformly dominates the other. No-arbitrage models are more useful at shorter horizons 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. Copyright © 2010 John Wiley & Sons, Ltd.