Predicting the yield curve using forecast combinations

João F. Caldeira, Guilherme V. Moura*, André A.P. Santos

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

An examination of the statistical accuracy and economic value of modeling and forecasting the term structure of interest rates using forecast combinations is considered. Five alternative methods to combine point forecasts from several univariate and multivariate autoregressive specifications including dynamic factor models, equilibrium term structure models, and forward rate regression models are used. Moreover, a detailed performance evaluation based not only on statistical measures of forecast accuracy, but also on Sharpe ratios of fixed income portfolios is conducted. An empirical application based on a large panel of Brazilian interest rate future contracts with different maturities shows that combined forecasts consistently outperform individual models in several instances, specially when economic criteria are taken into account.

Original languageEnglish
Pages (from-to)79-98
Number of pages20
JournalComputational Statistics and Data Analysis
Volume100
Early online date23 May 2014
DOIs
Publication statusPublished - 2016

Keywords

  • economic value of forecasts
  • forecast combinations
  • yield curve

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