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The Predictive Power of Nelson-Siegel Factor Loadings for the Real Economy

51 Pages Posted: 4 Aug 2016 Last revised: 22 Sep 2017

Anqi Jiao

University of Alabama - Department of Economics, Finance and Legal Studies

Jun Ma

Northeastern University - Department of Economics

Date Written: September 21, 2017

Abstract

We allow the loading parameter λ in the Nelson-Siegel model to vary over time in a simplistic way that was originally experimented by Nelson and Siegel (1987). We find that the time-varying λ factor, which determines the relative factor loadings, increases dramatically and becomes volatile ahead of recessions, and declines afterward in both its level and volatility. Information in the time-varying λ factor has strong predictive power for real economic activity at horizons beyond 12 months. We show that information in the time-varying λ factor is independent of other conventional yield curve predictors, such as the yield spread, and is informative to the future market uncertainty.

Keywords: Yield Curve, Term Structure of Interest Rate, Uncertainty, Nelson-Siegel Model, Economic Activity Forecasting

JEL Classification: G17, E43, E44, E47, C53

Suggested Citation

Jiao, Anqi and Ma, Jun, The Predictive Power of Nelson-Siegel Factor Loadings for the Real Economy (September 21, 2017). Available at SSRN: https://ssrn.com/abstract=2818055 or http://dx.doi.org/10.2139/ssrn.2818055

Anqi Jiao (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

Jun Ma

Northeastern University - Department of Economics ( email )

301 Lake Hall
360 Huntington Avenue
Boston, MA MA 02446
United States

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