Arbeitspapier
Forecasting with the term structure: The role of no-arbitrage restrictions
No-arbitrage term structure models impose cross-sectional restrictions among yields and can be used to impose dynamic restrictions on risk compensation. This paper evaluates the importance of these restrictions when using the term structure to forecast future bond yields. It concludes that no cross-sectional restrictions are helpful, because cross-sectional properties of yields are easy to infer with high precision. Dynamic restrictions are useful, but can be imposed without relying on the no-arbitrage structure. In practice, the most important dynamic restriction is that the first principal component of Treasury yields follows a random walk. A simple model built around this assumption produces out-of-sample forecasts that are more accurate than those of a variety of alternative dynamic models.
- Language
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Englisch
- Bibliographic citation
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Series: Working Paper ; No. 576
- Classification
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Wirtschaft
- Event
-
Geistige Schöpfung
- (who)
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Duffee, Gregory R.
- Event
-
Veröffentlichung
- (who)
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The Johns Hopkins University, Department of Economics
- (where)
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Baltimore, MD
- (when)
-
2011
- Handle
- Last update
- 10.03.2025, 11:42 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Duffee, Gregory R.
- The Johns Hopkins University, Department of Economics
Time of origin
- 2011
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