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Forecasting the term structure of government bond yields in unstable environments

Byrne, JP and Cao, S and Korobilis, D (2017) 'Forecasting the term structure of government bond yields in unstable environments.' Journal of Empirical Finance, 44 (C). pp. 209-225. ISSN 0927-5398

1-s2.0-S0927539817300804-main.pdf - Accepted Version

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In this paper we model and predict the term structure of US interest rates in a data-rich and unstable environment. The dynamic Nelson-Siegel factor model is extended to allow the model dimension and the parameters to change over time, in order to account for both model uncertainty and sudden structural changes, in one setting. The proposed specification performs better than several alternatives, since it incorporates additional macro-finance information during hard times, while it allows for more parsimonious models to be relevant during normal periods. A dynamic variance decomposition measure constructed from our model shows that parameter uncertainty and model uncertainty regarding different choices of predictors explain a large proportion of the predictive variance of bond yields.

Item Type: Article
Uncontrolled Keywords: Term structure of interest rates; Nelson-Siegel; Dynamic model averaging; Bayesian methods; Term premia
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 13 Oct 2017 14:03
Last Modified: 18 Aug 2022 10:36

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