Nelson-Siegel, Affine and Quadratic Yield Curve Specifications: Which One is Better at Forecasting?

60 Pages Posted: 9 Jun 2010

See all articles by Ken Nyholm

Ken Nyholm

European Central Bank (ECB)

Rositsa Vidova-Koleva

affiliation not provided to SSRN

Date Written: May 18, 2010

Abstract

In this paper we compare the in-sample fit and out-of-sample forecasting performance of no-arbitrage quadratic and essentially affine term structure models, as well as the dynamic Nelson-Siegel model. In total eleven model variants are evaluated, comprising five quadratic, four affine and two Nelson-Siegel models. Recursive re-estimation and out-of-sample one-, six- and twelve-months ahead forecasts are generated and evaluated using monthly US data for yields observed at maturities of 1, 6, 12, 24, 60 and 120 months. Our results indicate that quadratic models provide the best in-sample fit, while the best out-of-sample performance is generated by three-factor affine models and the dynamic Nelson-Siegel model variants. However, statistical tests fail to identify one single-best forecasting model class.

Keywords: Nelson-Siegel model, affine term structure models, quadratic yield curve models, forecast performance

JEL Classification: C14, C15, G12

Suggested Citation

Nyholm, Ken and Vidova-Koleva, Rositsa, Nelson-Siegel, Affine and Quadratic Yield Curve Specifications: Which One is Better at Forecasting? (May 18, 2010). ECB Working Paper No. 1205, Available at SSRN: https://ssrn.com/abstract=1610230

Ken Nyholm (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Rositsa Vidova-Koleva

affiliation not provided to SSRN ( email )

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