Anchoring the Yield Curve Using Survey Expectations

Posted: 19 Nov 2013

See all articles by Carlo Altavilla

Carlo Altavilla

European Central Bank (ECB)

Raffaella Giacomini

University College London - Department of Economics; University of California, Los Angeles - Department of Economics

Giuseppe Ragusa

University of Pisa - Department of Economics and Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 2013

Abstract

The dynamic behavior of the term structure of interest rates is difficult to replicate with models, and even models with a proven track record of empirical performance have underperformed since the early 2000s. On the other hand, survey expectations are accurate predictors of yields, but only for very short maturities. We argue that this is partly due to the ability of survey participants to incorporate information about the current state of the economy as well as forward-looking information such as that contained in monetary policy announcements. We show how the informational advantage of survey expectations about short yields can be exploited to improve the accuracy of yield curve forecasts given by a base model. We do so by employing a flexible projection method that anchors the model forecasts to the survey expectations in segments of the yield curve where the informational advantage exists and transmits the superior forecasting ability to all remaining yields. The method implicitly incorporates into yield curve forecasts any information that survey participants have access to, without the need to explicitly model it. We document that anchoring delivers large and significant gains in forecast accuracy for the whole yield curve, with improvements of up to 52% over the years 2000-2012 relative to the class of models that are widely adopted by financial and policy institutions for forecasting the term structure of interest rates.

Keywords: blue chip analysts survey, exponential tilting, forecast performance, macroeconomic factors, monetary policy forward guidance, term structure models

JEL Classification: C5, E4, G1

Suggested Citation

Altavilla, Carlo and Giacomini, Raffaella and Ragusa, Giuseppe, Anchoring the Yield Curve Using Survey Expectations (November 2013). CEPR Discussion Paper No. DP9738. Available at SSRN: https://ssrn.com/abstract=2356968

Carlo Altavilla (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Raffaella Giacomini

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

University of California, Los Angeles - Department of Economics ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095-1361
United States

Giuseppe Ragusa

University of Pisa - Department of Economics and Management ( email )

Italy

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