Dynamic modeling approach to forecast the term structure of government bond yields
Institution: | University of Texas – Austin |
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Department: | Statistics |
Degree: | MSin Statistics |
Year: | 2013 |
Keywords: | Nelson-Siegel model; Arbitrage free; Yield curve |
Record ID: | 2004839 |
Full text PDF: | http://hdl.handle.net/2152/22587 |
Since arbitrage-free is a desirable theoretical feature in a healthy financial market, many efforts have been made to construct arbitrage-free models for yield curves. However, little attention is paid to review if such restriction will improve yield forecast. We evaluate the importance of arbitrage-free restriction on dynamic Nelson-Siegel term structure when forecasting yield curves. We find that it doesn’t help. We also compare these two Nelson-Siegel dynamic models with a benchmark dynamic model and show that Nelson-Siegel structure improve forecasts for long-maturity yields.