Forecasting the Joint Probability Density of Bond Yields: Can Affine Models Beat Random Walk?

33 Pages Posted: 1 Aug 2003

See all articles by Yongmiao Hong

Yongmiao Hong

Cornell University - Department of Economics

Haitao Li

University of Michigan - Stephen M. Ross School of Business; Cheung Kong Graduate School of Business; Cheung Kong Graduate School of Business

Alexei V. Egorov

West Virginia University - College of Business & Economics

Abstract

The numerous empirical studies on affine term structure models have primarily focused on the in-sample fit of historical bond yields and ignored the out-of-sample forecast of future bond yields. Based on an omnibus nonparametric procedure for density forecast evaluation developed in this paper, we provide probably the first comprehensive empirical analysis of the out-of-sample performance of affine models in forecasting the joint conditional probability density of bond yields. We show that although it is difficult to forecast the conditional mean of bond yields, some affine models have good forecasts of the joint conditional density of bond yields and they significantly outperform the simple random walk models in density forecast. Our analysis demonstrates the great potential of affine models for financial risk management in fixed-income markets.

Keywords: Density forecast, Affine term structure models, Probability integral transform, Financial risk management, Value-at-Risk, Fixed-income portfolio management

Suggested Citation

Hong, Yongmiao and Li, Haitao and Egorov, Alexei V., Forecasting the Joint Probability Density of Bond Yields: Can Affine Models Beat Random Walk?. Available at SSRN: https://ssrn.com/abstract=424023 or http://dx.doi.org/10.2139/ssrn.424023

Yongmiao Hong (Contact Author)

Cornell University - Department of Economics ( email )

Department of Statistical Science
414 Uris Hall
Ithaca, NY 14853-7601
United States
607-255-5130 (Phone)
607-255-2818 (Fax)

Haitao Li

University of Michigan - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-615-5475 (Phone)

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Alexei V. Egorov

West Virginia University - College of Business & Economics ( email )

Morgantown, WV 26506-6025
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
412
Abstract Views
2,753
Rank
147,778
PlumX Metrics