Yield Curve Forecasts and the Predictive Power of Macro Variables in a VAR Framework
DOI:
https://doi.org/10.6000/1929-7092.2014.03.29Keywords:
Macroeconomic variables, Nelson and Siegel curve, term structure of interest rates, VAR models, yield curve.Abstract
Recent macro-finance papers have documented the importance of adding information from macro variables in order to improve out-of-sample forecasting performance of bond yields. This paper aims at investigating the reasons for this success. We use Diebold and Li's dynamic version of the Nelson and Siegel exponential approximation of the yield curve to estimate the factors that govern its dynamics. Factors and macro variables are modeled simultaneously in a VAR framework, which is then used to forecast the factors. Our main conclusions are (i) this framework is useful in forecasting slope and curvature factors, but not the level factor; and (ii) to get good results in forecasting the level factor, one needs a macro model which incorporates variables related to long-run trends and expectations.References
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http://dx.doi.org/10.1198/073500102317351930
Ang, A. and Piazzesi, M., 2003, A no-Arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables, Journal of Monetary Economics, vol. 50, no. 4, 745-787.
http://dx.doi.org/10.1016/S0304-3932(03)00032-1
Ang, A., Piazzesi, M. and Wei, M., 2006, What does the yield curve tell us about GDP growth?, Journal of Econometrics, 131, 359-403.
http://dx.doi.org/10.1016/j.jeconom.2005.01.032
Ang, A., Bekaert, G. and Wei, M., 2008, The term structure of real rates and expected inflation, The Journal of Finance, vol. 63(2), 797-849.
http://dx.doi.org/10.1111/j.1540-6261.2008.01332.x
Bernanke, B., Gertler, M. and Watson, M., 1997, Systematic monetary policy and the effects of oil price shocks, Working Paper 97-25, C.V. Starr Center for Applied Economics, New York University.
Campbell, J., 1995, Some lessons from the yield curve, Journal of Economic Perspectives, vol. 9(3), 129-152.
http://dx.doi.org/10.1257/jep.9.3.129
Campbell, J. and Shiller, R., 1991, Yield spreads and interest rate movements: a bird's eye view, Review of Economic Studies, vol. 58(3), 495-514.
http://dx.doi.org/10.2307/2298008
Chan, K., Karolyi, A., Longstaff, F. and Sanders, A., 1992, An empirical comparison of alternative models of the term structure of interest rates, The Journal of Finance, vol. 47(3), 1209-1227.
http://dx.doi.org/10.1111/j.1540-6261.1992.tb04011.x
Christiansen, C. and Lund, J., 2005, Revisiting the shape of the yield curve: the effect of interest rate volatility, EFA 2002 Berlin Meetings Presented Paper.
Clarida, R., Galí, J. and Gertler, M., 1999, The science of monetary policy: a new Keynesian perspective, Journal of Economic Literature, vol. 37(4), 1661-1707.
http://dx.doi.org/10.1257/jel.37.4.1661
Dewachter, H. and Lyrio, M., 2006, Macro factors and the term structure of interest rates, Journal of Money, Credit, and Banking, vol. 38 (1), 119 -140.
http://dx.doi.org/10.1353/mcb.2006.0014
De Pooter, M., 2007, Examining the Nelson-Siegel class of term structure models, Tinbergen Institute Discussion Papers 07-043/4.
Diebold, F. and Li, C., 2006, Forecasting the term structure of government bond yields, Journal of Econometrics, vol. 130, 337-364.
http://dx.doi.org/10.1016/j.jeconom.2005.03.005
Francis Diebold, F., Li, C. and Yue, V., 2008, Global yield curve dynamics and interactions: a generalized Nelson and Siegel approach, Journal of Econometrics, 146, 351-363.
http://dx.doi.org/10.1016/j.jeconom.2008.08.017
Diebold, F. and Mariano, R., 1995, Comparing predictive accuracy, Journal of Business and Economic Statistics, 13, 253-263.
Diebold, F., Rudebusch, G. and Aruoba, S., 2006, The macroeconomy and the yield curve: a dynamic latent factor approach, Journal of Econometrics, vol. 127(1-2), 309-338.
http://dx.doi.org/10.1016/j.jeconom.2005.01.011
Duffee, G., 2002, Term premia and interest rate forecasts in affine models, Journal of Finance, 57, 405-443.
http://dx.doi.org/10.1111/1540-6261.00426
Engle, R. and Ng, V., 1993, Time-varying volatility and the dynamic behavior of the term structure, Journal of Money, Credit and Banking, vol. 25(3), 336-349.
http://dx.doi.org/10.2307/2077766
Estrella, A., 2005, Why does the yield curve predict output and inflation?, Economic Journal, vol. 115, 722-744.
http://dx.doi.org/10.1111/j.1468-0297.2005.01017.x
Estrella, A. and Hardouvelis, G., 1991, The term structure as a predictor of real economic activity, Journal of Finance, 46, 555-576.
http://dx.doi.org/10.1111/j.1540-6261.1991.tb02674.x
Estrella, A. and Mishkin, F., 1997, The predictive power of the term structure of interest rates in Europe and the United States: implications for the European Central Bank, European Economic Review, 41, 1375-1401.
http://dx.doi.org/10.1016/S0014-2921(96)00050-5
Evans, C. and Marshall, D., 1998, Monetary policy and the term structure of nominal interest rates: evidence and theory,
Carnegie-Rochester Conference Series on Public Policy, vol. 49, 53-111.
http://dx.doi.org/10.1016/S0167-2231(99)00004-4
Evans, C. and Marshall, D., 2002, Economic determinants of the nominal treasury yield curve, Working Paper 2001-16, Federal Reserve Bank of Chicago.
Hall, A., Anderson, H. and Granger, C., 1992, A cointegration analysis of treasury bill yields, Review of Economics and Statistics, vol. 74, no. 1, 116-126.
http://dx.doi.org/10.2307/2109549
Hamilton, J., 1988, Rational-expectations econometric analysis of changes in regime: an investigation of the term structure of interest rates, Journal of Economic Dynamics and Control 12, 385-423.
http://dx.doi.org/10.1016/0165-1889(88)90047-4
Hördahl, P., Tristani, O. and Vestin, D., 2006, A joint econometric model of macroeconomic and term structure dynamics, Journal of Econometrics, vol. 127, 405-444.
http://dx.doi.org/10.1016/j.jeconom.2005.01.012
Knez, P., Litterman, R. and Scheinkman, J. 1994, Explorations into factors explaining money market returns, The Journal of Finance, vol. 49(5), 1861-1882.
http://dx.doi.org/10.1111/j.1540-6261.1994.tb04784.x
Kozicki, S., 1997, Predicting real growth and inflation with the yield spread, Federal Reserve Bank of Kansas City Economic Review, 82, 39-57.
Litterman, R. and Scheinkman, J., 1991, Common factors affecting bond returns, Journal of Fixed Income, vol. 1, 44-51.
http://dx.doi.org/10.3905/jfi.1991.692347
Mishkin, F., 1998, The information in the term structure: some further results, Journal of Applied Econometrics, Volume 3, Issue 4, 307-314.
Nelson, C. R. and Siegel. A. F. (1987). Parsimonious Modeling of Yield Curves. The Journal of Business, vol. 60(4), 473-489.
Sims, C., Stock, J. and Watson, M., 1990, Inference in linear time series models with some unit roots, Econometrica, volume 58, issue 1, 113-144.
http://dx.doi.org/10.2307/2938337
Sims, C. and Uhlig, H., 1991, Understanding unit rooters: a helicopter tour, Econometrica, volume 59, issue 6, 1591-1599.
http://dx.doi.org/10.2307/2938280
Stock, J. and Watson, M., 2000, Forecasting output and inflation: the role of asset prices, manuscript, Kennedy School of Government (revised January 2003).
Svensson, L., 1994, Estimating and interpreting forward interest rates: Sweden 1992-1994, IMF Working Paper 94/114, available at SSRN: http://ssrn.com/abstract=883856
Taylor, J., 1993, Discretion versus policy rules in practice, Carnegie-Rochester Conference Series on Public Policy, 39, 195-214.
http://dx.doi.org/10.1016/0167-2231(93)90009-L
Woodford, M., 2003, Interest and prices, Princeton University Press.
Wu, T., 2001, Stylized facts on nominal term structure and business cycles: an empirical VAR approach, Working Paper 2002-08, Federal Reserve Bank of San Francisco.
Zellner, A. (1992). Statistics Science and Public Policy (ASA Presidential Address). Journal of the American Statistical Association, 87, 1-6.
http://dx.doi.org/10.1198/073500102317351930
Ang, A. and Piazzesi, M., 2003, A no-Arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables, Journal of Monetary Economics, vol. 50, no. 4, 745-787.
http://dx.doi.org/10.1016/S0304-3932(03)00032-1
Ang, A., Piazzesi, M. and Wei, M., 2006, What does the yield curve tell us about GDP growth?, Journal of Econometrics, 131, 359-403.
http://dx.doi.org/10.1016/j.jeconom.2005.01.032
Ang, A., Bekaert, G. and Wei, M., 2008, The term structure of real rates and expected inflation, The Journal of Finance, vol. 63(2), 797-849.
http://dx.doi.org/10.1111/j.1540-6261.2008.01332.x
Bernanke, B., Gertler, M. and Watson, M., 1997, Systematic monetary policy and the effects of oil price shocks, Working Paper 97-25, C.V. Starr Center for Applied Economics, New York University.
Campbell, J., 1995, Some lessons from the yield curve, Journal of Economic Perspectives, vol. 9(3), 129-152.
http://dx.doi.org/10.1257/jep.9.3.129
Campbell, J. and Shiller, R., 1991, Yield spreads and interest rate movements: a bird's eye view, Review of Economic Studies, vol. 58(3), 495-514.
http://dx.doi.org/10.2307/2298008
Chan, K., Karolyi, A., Longstaff, F. and Sanders, A., 1992, An empirical comparison of alternative models of the term structure of interest rates, The Journal of Finance, vol. 47(3), 1209-1227.
http://dx.doi.org/10.1111/j.1540-6261.1992.tb04011.x
Christiansen, C. and Lund, J., 2005, Revisiting the shape of the yield curve: the effect of interest rate volatility, EFA 2002 Berlin Meetings Presented Paper.
Clarida, R., Galí, J. and Gertler, M., 1999, The science of monetary policy: a new Keynesian perspective, Journal of Economic Literature, vol. 37(4), 1661-1707.
http://dx.doi.org/10.1257/jel.37.4.1661
Dewachter, H. and Lyrio, M., 2006, Macro factors and the term structure of interest rates, Journal of Money, Credit, and Banking, vol. 38 (1), 119 -140.
http://dx.doi.org/10.1353/mcb.2006.0014
De Pooter, M., 2007, Examining the Nelson-Siegel class of term structure models, Tinbergen Institute Discussion Papers 07-043/4.
Diebold, F. and Li, C., 2006, Forecasting the term structure of government bond yields, Journal of Econometrics, vol. 130, 337-364.
http://dx.doi.org/10.1016/j.jeconom.2005.03.005
Francis Diebold, F., Li, C. and Yue, V., 2008, Global yield curve dynamics and interactions: a generalized Nelson and Siegel approach, Journal of Econometrics, 146, 351-363.
http://dx.doi.org/10.1016/j.jeconom.2008.08.017
Diebold, F. and Mariano, R., 1995, Comparing predictive accuracy, Journal of Business and Economic Statistics, 13, 253-263.
Diebold, F., Rudebusch, G. and Aruoba, S., 2006, The macroeconomy and the yield curve: a dynamic latent factor approach, Journal of Econometrics, vol. 127(1-2), 309-338.
http://dx.doi.org/10.1016/j.jeconom.2005.01.011
Duffee, G., 2002, Term premia and interest rate forecasts in affine models, Journal of Finance, 57, 405-443.
http://dx.doi.org/10.1111/1540-6261.00426
Engle, R. and Ng, V., 1993, Time-varying volatility and the dynamic behavior of the term structure, Journal of Money, Credit and Banking, vol. 25(3), 336-349.
http://dx.doi.org/10.2307/2077766
Estrella, A., 2005, Why does the yield curve predict output and inflation?, Economic Journal, vol. 115, 722-744.
http://dx.doi.org/10.1111/j.1468-0297.2005.01017.x
Estrella, A. and Hardouvelis, G., 1991, The term structure as a predictor of real economic activity, Journal of Finance, 46, 555-576.
http://dx.doi.org/10.1111/j.1540-6261.1991.tb02674.x
Estrella, A. and Mishkin, F., 1997, The predictive power of the term structure of interest rates in Europe and the United States: implications for the European Central Bank, European Economic Review, 41, 1375-1401.
http://dx.doi.org/10.1016/S0014-2921(96)00050-5
Evans, C. and Marshall, D., 1998, Monetary policy and the term structure of nominal interest rates: evidence and theory,
Carnegie-Rochester Conference Series on Public Policy, vol. 49, 53-111.
http://dx.doi.org/10.1016/S0167-2231(99)00004-4
Evans, C. and Marshall, D., 2002, Economic determinants of the nominal treasury yield curve, Working Paper 2001-16, Federal Reserve Bank of Chicago.
Hall, A., Anderson, H. and Granger, C., 1992, A cointegration analysis of treasury bill yields, Review of Economics and Statistics, vol. 74, no. 1, 116-126.
http://dx.doi.org/10.2307/2109549
Hamilton, J., 1988, Rational-expectations econometric analysis of changes in regime: an investigation of the term structure of interest rates, Journal of Economic Dynamics and Control 12, 385-423.
http://dx.doi.org/10.1016/0165-1889(88)90047-4
Hördahl, P., Tristani, O. and Vestin, D., 2006, A joint econometric model of macroeconomic and term structure dynamics, Journal of Econometrics, vol. 127, 405-444.
http://dx.doi.org/10.1016/j.jeconom.2005.01.012
Knez, P., Litterman, R. and Scheinkman, J. 1994, Explorations into factors explaining money market returns, The Journal of Finance, vol. 49(5), 1861-1882.
http://dx.doi.org/10.1111/j.1540-6261.1994.tb04784.x
Kozicki, S., 1997, Predicting real growth and inflation with the yield spread, Federal Reserve Bank of Kansas City Economic Review, 82, 39-57.
Litterman, R. and Scheinkman, J., 1991, Common factors affecting bond returns, Journal of Fixed Income, vol. 1, 44-51.
http://dx.doi.org/10.3905/jfi.1991.692347
Mishkin, F., 1998, The information in the term structure: some further results, Journal of Applied Econometrics, Volume 3, Issue 4, 307-314.
Nelson, C. R. and Siegel. A. F. (1987). Parsimonious Modeling of Yield Curves. The Journal of Business, vol. 60(4), 473-489.
Sims, C., Stock, J. and Watson, M., 1990, Inference in linear time series models with some unit roots, Econometrica, volume 58, issue 1, 113-144.
http://dx.doi.org/10.2307/2938337
Sims, C. and Uhlig, H., 1991, Understanding unit rooters: a helicopter tour, Econometrica, volume 59, issue 6, 1591-1599.
http://dx.doi.org/10.2307/2938280
Stock, J. and Watson, M., 2000, Forecasting output and inflation: the role of asset prices, manuscript, Kennedy School of Government (revised January 2003).
Svensson, L., 1994, Estimating and interpreting forward interest rates: Sweden 1992-1994, IMF Working Paper 94/114, available at SSRN: http://ssrn.com/abstract=883856
Taylor, J., 1993, Discretion versus policy rules in practice, Carnegie-Rochester Conference Series on Public Policy, 39, 195-214.
http://dx.doi.org/10.1016/0167-2231(93)90009-L
Woodford, M., 2003, Interest and prices, Princeton University Press.
Wu, T., 2001, Stylized facts on nominal term structure and business cycles: an empirical VAR approach, Working Paper 2002-08, Federal Reserve Bank of San Francisco.
Zellner, A. (1992). Statistics Science and Public Policy (ASA Presidential Address). Journal of the American Statistical Association, 87, 1-6.
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Published
2014-10-24
How to Cite
Vereda, L., Lopes, H., Kubrusly, J., & Pizzinga, A. (2014). Yield Curve Forecasts and the Predictive Power of Macro Variables in a VAR Framework. Journal of Reviews on Global Economics, 3, 377–393. https://doi.org/10.6000/1929-7092.2014.03.29
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