Forecasting the term structure of interest rates and portfolio planning models

This paper analyzes the impact of interest rate forecast quality—both forecast yields and the covariants matrix of yield forecasts—on optimal portfolios developed by quadratic programming. Forecast equations are estimated for a term structure of government securities because of the importance to banking of such restricted portfolios. A cost/ benefit comparison between actual and optimal portfolios using both forecast and realized yields provides an estimate of the economic value of risk information.