Term structure forecasting in affine framework with time-varying volatility

Term structure forecasting in affine framework with time-varying volatility This study extends the affine Nelson–Siegel model by introducing the time-varying volatility component in the observation equation of yield curve, modeled as a standard EGARCH process. The model is illustrated in state-space framework and empirically compared to the standard affine and dynamic Nelson–Siegel model in terms of in-sample fit and out-of-sample forecast accuracy. The affine based extended model that accounts for time-varying volatility outpaces the other models for fitting the yield curve and produces relatively more accurate 6- and 12-month ahead forecasts, while the standard affine model comes with more precise forecasts for the very short forecast horizons. The study concludes that the standard and affine Nelson–Siegel models have higher forecasting capability than their counterpart EGARCH based models for the short forecast horizons, i.e., 1 month. The EGARCH based extended models have excellent performance for the medium and longer forecast horizons. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Statistical Methods & Applications Springer Journals

Term structure forecasting in affine framework with time-varying volatility

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Publisher
Springer Berlin Heidelberg
Copyright
Copyright © 2017 by Springer-Verlag Berlin Heidelberg
Subject
Statistics; Statistics, general; Statistical Theory and Methods
ISSN
1618-2510
eISSN
1613-981X
D.O.I.
10.1007/s10260-017-0378-y
Publisher site
See Article on Publisher Site

Abstract

This study extends the affine Nelson–Siegel model by introducing the time-varying volatility component in the observation equation of yield curve, modeled as a standard EGARCH process. The model is illustrated in state-space framework and empirically compared to the standard affine and dynamic Nelson–Siegel model in terms of in-sample fit and out-of-sample forecast accuracy. The affine based extended model that accounts for time-varying volatility outpaces the other models for fitting the yield curve and produces relatively more accurate 6- and 12-month ahead forecasts, while the standard affine model comes with more precise forecasts for the very short forecast horizons. The study concludes that the standard and affine Nelson–Siegel models have higher forecasting capability than their counterpart EGARCH based models for the short forecast horizons, i.e., 1 month. The EGARCH based extended models have excellent performance for the medium and longer forecast horizons.

Journal

Statistical Methods & ApplicationsSpringer Journals

Published: Mar 25, 2017

References

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