When the yield curve is modelled using an affine factor model, residuals may still contain relevant information and do not adhere to the familiar white noise assumption. This paper proposes a pragmatic way to improve out of sample performance for yield curve forecasting. The proposed adjustment is illustrated via a pseudo out-of-sample forecasting exercise implementing the widely used Dynamic Nelson-Siegel model. Large improvement in forecasting performance is achieved throughout the curve for different forecasting horizons. Results are robust to different time periods, as well as to different model specifications.

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doi.org/10.1016/j.econlet.2015.01.022, hdl.handle.net/1765/85509
Economics Letters
Department of Econometrics

Raviv, E. (2015). Prediction bias correction for dynamic term structure models. Economics Letters, 129, 112–115. doi:10.1016/j.econlet.2015.01.022