Term Structure Dynamics, Macro-Finance Factors and Model Uncertainty

Joseph Paul Byrne, Shuo Cao, Dimitris Korobilis

Research output: Working paperDiscussion paper

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Abstract

This paper models and predicts the term structure of US interest rates in a data rich environment. We allow the model dimension and parameters to change over time, accounting for model uncertainty and sudden structural changes. The proposed time-varying parameter Nelson-Siegel Dynamic Model Averaging (DMA) predicts yields better than standard benchmarks. DMA performs better since it incorporates more macro-finance information during recessions. The proposed method allows us to estimate plausible real-time term premia, whose countercyclicality weakened during the financial crisis.
Original languageEnglish
Publication statusPublished - 2016

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