Forecasting the term structures of Treasury and corporate yields using dynamic Nelson-Siegel models |
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Authors: | Wei-Choun YuAuthor Vitae Eric ZivotAuthor Vitae |
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Institution: | a Winona State University, MN, United Statesb University of Washington, Seattle, WA, United States |
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Abstract: | We extend Diebold and Li’s dynamic Nelson-Siegel three-factor model to a broader empirical prospective by including the evaluation of the state space approach and by using nine different ratings for corporate bonds. We find that the dynamic Nelson-Siegel factor AR(1) model outperforms other competitors on the out-of-sample forecast accuracy, especially on the investment-grade bonds for the short-term forecast horizon and on the high-yield bonds for the long-term forecast horizon. The dynamic Nelson-Siegel factor state space model, however, becomes appealing on the high-yield bonds in the short-term forecast horizon, where the factor dynamics are more likely time-varying and parameter instability is more probable in the model specification. |
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Keywords: | Term structures Treasury yields Corporate yields Nelson-Siegel model Factor model AR(1) VAR(1) Out-of-sample forecasting evaluations |
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