Forecasting the Yield Curve in a Data-Rich Environment: A No-Arbitrage Factor-Augmented VAR Approach

By Emanuel Moench. Social Science Research Network, 2008

308 citations recorded by the source corpus.

This paper suggests a term structure model which parsimoniously exploits a broad macroeconomic information set. The model uses the short rate and the common components of a large number of macroeconomic variables as factors. Precisely, the dynamics of the short rate are modeled with a Factor-Augmented Vector Autoregression and the term structure is derived using parameter restrictions implied by no-arbitrage. The model has economic appeal and provides better out-of-sample yield forecasts at intermediate and long horizons than a number of previously suggested approaches. The forecast improvement is highly significant and particularly pronounced for short and medium-term maturities.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/9e5e77373c07d686f131346f92d9ae92e0f2c7d2

How researchers see this paper

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In Economics and Econometrics

1. Serena Ng
2. Sydney C. Ludvigson
3. Jushan Bai
4. Todd E. Clark
5. Kunpeng Li
6. Mark W. Watson
7. James H. Stock
8. Michael W. McCracken

In Finance

1. Jushan Bai
2. Serena Ng
3. Sydney C. Ludvigson
4. Michael W. McCracken
5. Kunpeng Li
6. Todd E. Clark
7. Lina Lu
8. Mark W. Watson

Citations in the corpus

• Macro Factors in Bond Risk Premia (2005, background): “the period 1988–2003, Piazzesi and Swanson (2004) find that the growth of nonfarm payroll employment is a strong predictor of excess returns on federal funds futures contracts.”
• Estimation and Inference of FAVAR Models (2014, background): “(For example, Boivin, Giannoni, and Mihov (2009), Bianchi, Mumtaz, and Surico (2009), Forni and Gambetti (2010), Moench (2008), and Ludvigson and Ng (2009), to name a few.”
• Reality Checks and Comparisons of Nested Predictive Models (2012, background): “…Kilian (1999); Butler, Grullon and Weston (2005); Sarno, et al. (2005); Cooper and Gulen (2006); Guo (2006); Rapach and Wohar (2006); Bruneau, et al. (2007); Rapach and Strauss (2007); Moench (2008); Billmeier (2009); Chen, et al. (2009); Hendry and Hubrich (2009); and Molodtsova and Papell (2009).”