European Investment Bank, Luxembourg.
Nelson–Siegel, Affine and Quadratic Yield Curve Specifications: Which One is Better at Forecasting?
Article first published online: 1 AUG 2011
Copyright © 2011 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 31, Issue 6, pages 540–564, September 2012
How to Cite
Nyholm, K. and Vidova-Koleva, R. (2012), Nelson–Siegel, Affine and Quadratic Yield Curve Specifications: Which One is Better at Forecasting?. J. Forecast., 31: 540–564. doi: 10.1002/for.1239
- Issue published online: 13 AUG 2012
- Article first published online: 1 AUG 2011
- Nelson–Siegel model;
- affine term structure models;
- quadratic yield curve models;
- forecast performance
In this paper we compare the in-sample fit and out-of-sample forecasting performance of no-arbitrage quadratic, essentially affine and dynamic Nelson–Siegel term structure models. In total, 11 model variants are evaluated, comprising five quadratic, four affine and two Nelson–Siegel models. Recursive re-estimation and out-of-sample 1-, 6- and 12-month-ahead forecasts are generated and evaluated using monthly US data for yields observed at maturities of 1, 6, 12, 24, 60 and 120 months. Our results indicate that quadratic models provide the best in-sample fit, while the best out-of-sample performance is generated by three-factor affine models and the dynamic Nelson–Siegel model variants. Statistical tests fail to identify one single best forecasting model class. Copyright © 2011 John Wiley & Sons, Ltd.