| Author | Carlo A. Favero, Linlin Niu, Luca Sala |
| Content | 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. |
| JEL-Codes | C33, C53, E43, E44 |
| Keywords | Yield curve, term structure of interest rates, forecasting, large data set, factor models |
