Forecasting Bond Yields with Segmented Term Structure Models

Journal of Financial Econometrics, Vol. 16, Issue 1, 2017

51 Pages Posted: 30 Aug 2013 Last revised: 1 Jun 2021

See all articles by Caio Almeida

Caio Almeida

Princeton University

Kym Ardison

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Daniela Kubudi

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Axel Simonsen

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Jose Vicente

Government of the Federative Republic of Brazil - Central Bank of Brazil; Ibmec, Rio de Janeiro - IBMEC Business School

Date Written: December 9, 2016

Abstract

Inspired by the preferred-habitat theory, we propose parametric interest rate models that split the term structure into segments. The proposed models are compared to successful term structure benchmarks based on out-of-sample forecasting exercises using US Treasury data. We show that segmentation can improve long-horizon term structure forecasts when compared to non-segmentation. Additionally, introducing cointegration in latent factor dynamics of segmented models makes them particularly strong to forecast short-maturity yields. Better forecasting is justified by the segmented models' ability to accommodate idiosyncratic shocks in the cross-section of yields.

Keywords: Preferred-Habitat Theory, Error Correction Models, Model Selection, Exponential Splines, Local Shocks

JEL Classification: G51, G52, G53

Suggested Citation

Almeida, Caio and Ardison, Kym and Kubudi, Daniela and Simonsen, Axel and Vicente, Jose, Forecasting Bond Yields with Segmented Term Structure Models (December 9, 2016). Journal of Financial Econometrics, Vol. 16, Issue 1, 2017, Available at SSRN: https://ssrn.com/abstract=2316408 or http://dx.doi.org/10.2139/ssrn.2316408

Caio Almeida (Contact Author)

Princeton University ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

Kym Ardison

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Daniela Kubudi

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Axel Simonsen

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Jose Vicente

Government of the Federative Republic of Brazil - Central Bank of Brazil

P.O. Box 08670
SBS Quadra 3 Bloco B - Edificio-Sede
Brasilia, Distr. Federal 70074-900
Brazil

Ibmec, Rio de Janeiro - IBMEC Business School

SCN Quadra 2, Bloco A, 2nd. floor
Ed. Corporate Financial Center
Brasília, 707712-900
Brazil

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