No-Arbitrage Restrictions and Yield Curve Forecasting

17 Pages Posted: 25 Jan 2008  

Iryna Kaminska

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Date Written: December 8, 2007

Abstract

This paper proposes to use No-Arbitrage Affine Term Structure Models as prior information on a Vector Autoregression (VAR) of yields. We evaluate the forecasting performance of the proposed approach against alternative models such as an unrestricted VAR and a Random Walk. As a result, we show that using No-Arbitrage restrictions leads to significant improvements in forecasting the yield curve.

Keywords: Bayesian methods, Interest rate forecasting, Essentially Affine Term Structure Models, Vector Autoregression Models

Suggested Citation

Kaminska, Iryna and Carriero, Andrea, No-Arbitrage Restrictions and Yield Curve Forecasting (December 8, 2007). Available at SSRN: https://ssrn.com/abstract=1086405 or http://dx.doi.org/10.2139/ssrn.1086405

Iryna Kaminska (Contact Author)

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy

Andrea Carriero

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy
(39 02) 5836 3300 (Phone)
(39 02) 5836 3302 (Fax)

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