Forecasting the Yield Curve in a Data-Rich Environment Using the Factor-Augmented Nelson-Siegel Model

40 Pages Posted: 22 Mar 2010

See all articles by Peter Exterkate

Peter Exterkate

University of Sydney - School of Economics; Aarhus University - CREATES

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Christiaan Heij

Erasmus University Rotterdam (EUR) - Department of Econometrics

Patrick J. F. Groenen

Erasmus University Rotterdam (EUR)

Date Written: January 1, 2010

Abstract

Various ways of extracting macroeconomic information from a data-rich environment are compared with the objective of forecasting yield curves using the Nelson-Siegel model. Five issues in factor extraction are addressed, namely, selection of a subset of the available information, incorporation of the forecast objective in constructing factors, specification of a multivariate forecast objective, data grouping before constructing factors, and selection of the number of factors in a data-driven way. Our empirical results show that each of these features helps to improve forecast accuracy, especially for the shortest and longest maturities. The data-driven methods perform well in relatively volatile periods, when simpler models do not suffice.

Keywords: yield curve prediction, Nelson-Siegel model, factor extraction, variable selection

JEL Classification: C53, E43, E44

Suggested Citation

Exterkate, Peter and van Dijk, Dick J.C. and Heij, Christiaan and Groenen, Patrick J. F., Forecasting the Yield Curve in a Data-Rich Environment Using the Factor-Augmented Nelson-Siegel Model (January 1, 2010). Available at SSRN: https://ssrn.com/abstract=1568643 or http://dx.doi.org/10.2139/ssrn.1568643

Peter Exterkate

University of Sydney - School of Economics ( email )

Rm 370 Merewether (H04)
The University of Sydney
Sydney, NSW 2006 2008
Australia

Aarhus University - CREATES ( email )

Department of Economics and Business
Fuglesangs Allé 4
Aarhus V, 8210
Denmark

HOME PAGE: http://creates.au.dk/people/postdocs/peter-exterkate/

Dick J.C. Van Dijk (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
3000 DR Rotterdam
Netherlands

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1263 (Phone)
+31 10 4089162 (Fax)

HOME PAGE: http://people.few.eur.nl/djvandijk

Christiaan Heij

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Patrick J. F. Groenen

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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