No-Arbitrage Restrictions and Yield Curve Forecasting
University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)
Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research
December 8, 2007
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.
Number of Pages in PDF File: 17
Keywords: Bayesian methods, Interest rate forecasting, Essentially Affine Term Structure Models, Vector Autoregression Models
Date posted: January 25, 2008