A dynamic Nelson–Siegel model with forward-looking macroeconomic factors for the yield curve in the US

Abstract This paper employs a factor-augmented dynamic Nelson–Siegel (FADNS) model to predict the yield curve in the US that relies on a large data set of mostly forward-looking macroeconomic variables. FADNS models significantly improve interest rate forecasts relative to many extant models in the literature. For longer horizons, it outperforms autoregressive alternatives, with reductions in mean absolute forecast error of up to 18% using quarterly data and of up to 40% at higher frequencies. For shorter horizons, it is still competitive against autoregressive forecasts, outclassing them for 7- and 10-year yields. The out-of-sample analysis reveals that the forward-looking nature of the indicators we employ is crucial for improving forecasting performance. Including them indeed reduces the mean absolute error with respect to specifications based on backward-looking macroeconomic indicators for any model we consider.

• Publication year

  2019

• Venue

  Journal of Economic Dynamics and Control

• Publication date

  2019-09-01

• Fields of study

  Economics

• Identifiers
  DOI 10.1016/J.JEDC.2019.103720
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• No claims are published for this paper.

• No concepts are published for this paper.

• Forecasting and Trading Monetary Policy Effects on the Riskless Yield Curve with Regime Switching Nelson‐Siegel Models

  2019cited by this paper
• Forecasting the Brazilian yield curve using forward-looking variables

  2016cited by this paper
• Unspanned Macroeconomic Factors in the Yield Curve

  2016cited by this paper
• Robust Bond Risk Premia∗

  2015cited by this paper
• Expected Returns in Treasury Bonds

  2015cited by this paper
• Forecasting the Term Structure when Short‐Term Rates are Near Zero

  2014cited by this paper
• Bond returns and market expectations

  2013cited by this paper
• Risk Premiums in Dynamic Term Structure Models with Unspanned Macro Risks

  2013cited by this paper
• Anchoring the Yield Curve Using Survey Expectations

  2013cited by this paper
• Forecasting Interest Rates with Shifting Endpoints

  2012cited by this paper
• Evolving macroeconomic perceptions and the term structure of interest rates

  2012cited by this paper
• Term Structure Forecasting: No-arbitrage Restrictions Versus Large Information set

  2012cited by this paper
• The Yield Curve and the Macro-economy across Time and Frequencies" (Cef.up Working Paper nº. 2010-04, July 2010)

  2012cited by this paper
• Forecasting the Yield Curve Using Priors from No-Arbitrage Affine Term Structure Models

  2011cited by this paper
• A New Perspective on Gaussian Dynamic Term Structure Models

  2011cited by this paper
• How useful are no-arbitrage restrictions for forecasting the term structure of interest rates?

  2011cited by this paper
• Forecasting the Yield Curve in a Data-Rich Environment using the Factor-Augmented Nelson-Siegel Model

  2010cited by this paper
• Term Structure Forecasting Using Macro Factors and Forecast Combination

  2010cited by this paper
• Do Interest Rate Options Contain Information AboutEx ess Returns ?

  2010cited by this paper
• The Model Confidence Set ∗

  2009cited by this paper
• The role of no-arbitrage on forecasting: lessons from a parametric term structure model

  2008cited by this paper
• Predictions of Short-Term Rates and the Expectations Hypothesis of the Term Structure of Interest Rates

  2008cited by this paper
• Forecasting the Yield Curve in a Data-Rich Environment: A No-Arbitrage Factor-Augmented VAR Approach

  2008cited by this paper
• Predicting the Term Structure of Interest Rates: Incorporating Parameter Uncertainty, Model Uncertainty and Macroeconomic Information

  2007cited by this paper
• Forecasting with the term structure : The role of no-arbitrage

  2007cited by this paper
• Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?

  2007cited by this paper
• Forecasting the Term Structure of Government Bond Yields

  2006cited by this paper
• A Joint Econometric Model of Macroeconomic and Term Structure Dynamics

  2006cited by this paper
• Macro Factors in Bond Risk Premia

  2005cited by this paper
• Term Structure Estimation with Survey Data on Interest Rate Forecasts

  2005cited by this paper
• Advantages of the mean absolute error (MAE) over the root mean square error (RMSE) in assessing average model performance

  2005cited by this paper
• Bootstrap Standard Error Estimates for Linear Regression

  2005cited by this paper
• NBER WORKING PAPER SERIES THE MACROECONOMY AND THE YIELD CURVE: A DYNAMIC LATENT FACTOR APPROACH

  2004cited by this paper
• Monetary Policy in a Data-Rich Environment

  2003cited by this paper
• Nber Working Paper Series Measuring the Effects of Monetary Policy : a Factor-augmented Vector Autoregressive ( Favar ) Approach

  2003cited by this paper
• Macroeconomic Forecasting Using Diffusion Indexes

  2002cited by this paper
• Forecasting Using Principal Components From a Large Number of Predictors

  2002cited by this paper
• A Reality Check for Data Snooping

  2000cited by this paper
• Term premia and interest rate forecasts in affine models

  2000cited by this paper
• A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables

  1999cited by this paper
• Parsimonious modeling of yield curves

  1987cited by this paper

• Forecasting the U.S. Treasury Yield Curve: A Distributionally Robust Machine Learning Approach

  2026cites this paper
• Forecasting Asset Returns Using Nelson–Siegel Factors Estimated from the US Yield Curve

  2025cites this paper
• Forecasting the brazilian yield curve using macroeconomics expectations and time-varying volatility

  2025cites this paper
• High Frequency Online Inflation and Term Structure of Interest Rates: Evidence from China

  2025cites this paper
• A Quantile Nelson-Siegel model

  2024cites this paper
• The term structure of interest rates and economic activity: Evidence from the COVID‐19 pandemic

  2024cites this paper
• Forecasting interest rates with shifting endpoints: The role of the functional demographic age distribution

  2024cites this paper
• Optimal Time Varying Parameters in Yield Curve Modeling and Forecasting: A Simulation Study on BRICS Countries

  2024cites this paper
• Second Curvature Factor and Term Premium in U.S. Yield Curve: Insights from Deep Learning

  2023cites this paper
• Oil price shocks and the term structure of the US yield curve: a time–frequency analysis of spillovers and risk transmission

  2022cites this paper
• The impact of the Covid-19 related media coverage upon the five major developing markets

  2021cites this paper
• What Drives the Nominal Yield Curve in Brazil?

  2021cites this paper
• A Computational Analysis of the Tradeoff in the Estimation of Different State Space Specifications of Continuous Time Affine Term Structure Models

  2021cites this paper
• Can Zero-Coupon Bond Yield Curve Predict Economic Growth? – The Case of China

  2020cites this paper
• Forecasting and trading monetary policy effects on the riskless yield curve with regime switching Nelson–Siegel models

  2019cites this paper