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Term Structure Forecasting of Government Bond Yields with Latent and Macroeconomic Factors: Does Macroeconomic Factors Imply Better Out-of-Sample Forecasts?

Author

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  • Wali Ullah
  • Yoshihiko Tsukuda
  • Yasumasa Matsuda
Abstract
This study examines the role of macroeconomic and stock market variables in the dynamic Nelson-Siegel framework with the purpose of fitting and forecasting the term structure of interest rate. We find that incorporating the macroeconomic indicators in yield curve model leads to a better in-sample fit of the term structure. The out-of-sample predictability also improves significantly for all maturities for the short horizon forecasts, however regarding the longer horizons forecasts, the forecast performance of yields-macro and yields-only models is same for maturities beyond 5 years. The one-step state-space estimation approach employed to the yields-macro model produces accurate forecasts and outperforms the results of earlier related studies. Especially, the autocorrelation of the forecasts errors and in-sample residuals persistency across maturities, which is a common phenomenon in the statistical class of term structure models, can be reduced to a greater extent by inclusion of macroeconomic factors in the yield model.

Suggested Citation

  • Wali Ullah & Yoshihiko Tsukuda & Yasumasa Matsuda, 2012. "Term Structure Forecasting of Government Bond Yields with Latent and Macroeconomic Factors: Does Macroeconomic Factors Imply Better Out-of-Sample Forecasts?," TERG Discussion Papers 287, Graduate School of Economics and Management, Tohoku University.
    • Handle: RePEc:toh:tergaa:287
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    File URL: http://hdl.handle.net/10097/55764
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    Cited by:

    1. Massimo Guidolin & Manuela Pedio, 2019. "Forecasting and Trading Monetary Policy Effects on the Riskless Yield Curve with Regime Switching Nelson†Siegel Models," Working Papers 639, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Oguzhan Cepni & Ibrahim Ethem Guney & Doruk Kucuksarac & M. Hasan Yilmaz, 2021. "Do local and global factors impact the emerging markets' sovereign yield curves? Evidence from a data‐rich environment," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 40(7), pages 1214-1229, November.
    3. Wali Ullah & Yasumasa Matsuda & Yoshihiko Tsukuda, 2014. "Dynamics of the term structure of interest rates and monetary policy: is monetary policy effective during zero interest rate policy?," Journal of Applied Statistics, Taylor & Francis Journals, vol. 41(3), pages 546-572, March.
    4. Massimo Guidolin & Manuela Pedio, 2019. "Forecasting and Trading Monetary Policy Switching Nelson-Siegel Models," BAFFI CAREFIN Working Papers 19106, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    5. Wali Ullah, 2017. "Term structure forecasting in affine framework with time-varying volatility," Statistical Methods & Applications, Springer;Società Italiana di Statistica, vol. 26(3), pages 453-483, August.
    6. Wali Ullah & Yasumasa Matsuda, 2012. "Term Structure Modeling and Forecasting of Government Bond Yields : Does Macroeconomic Factors Imply Better Out-of-Sample Forecasts?," TERG Discussion Papers 304, Graduate School of Economics and Management, Tohoku University.
    7. Wali Ullah & Yasumasa Matsuda & Yoshihiko Tsukuda, 2015. "Generalized Nelson-Siegel term structure model: do the second slope and curvature factors improve the in-sample fit and out-of-sample forecasts?," Journal of Applied Statistics, Taylor & Francis Journals, vol. 42(4), pages 876-904, April.

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