Accurate Short-Term Yield Curve Forecasting Using Functional Gradient Descent

University of St. Gallen, Department of Economics, Discussion Paper No. 2007-24

51 Pages Posted: 10 Jul 2007

See all articles by Francesco Audrino

Francesco Audrino

University of St. Gallen

Fabio Trojani

Swiss Finance Institute; University of Geneva

Multiple version iconThere are 2 versions of this paper

Date Written: 2007-06

Abstract

We propose a multivariate nonparametric technique for generating reliable shortterm historical yield curve scenarios and confidence intervals. The approach is based on a Functional Gradient Descent (FGD) estimation of the conditional mean vector and covariance matrix of a multivariate interest rate series. It is computationally feasible in large dimensions and it can account for non-linearities in the dependence of interest rates at all available maturities. Based on FGD we apply filtered historical simulation to compute reliable out-of-sample yield curve scenarios and confidence intervals. We back-test our methodology on daily USD bond data for forecasting horizons from 1 to 10 days. Based on several statistical performance measures we find significant evidence of a higher predictive power of our method when compared to scenarios generating techniques based on (i) factor analysis, (ii) a multivariate CCC-GARCH model, or (iii) an exponential smoothing covariances estimator as in the RiskMetricsTM approach.

Keywords: Conditional mean and variance estimation, Filtered Historical Simulation, Functional

Suggested Citation

Audrino, Francesco and Trojani, Fabio, Accurate Short-Term Yield Curve Forecasting Using Functional Gradient Descent (2007-06). University of St. Gallen, Department of Economics, Discussion Paper No. 2007-24, Available at SSRN: https://ssrn.com/abstract=999515 or http://dx.doi.org/10.2139/ssrn.999515

Francesco Audrino (Contact Author)

University of St. Gallen ( email )

Bodanstrasse 6
St. Gallen, CH-9000
Switzerland

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva, Geneva
Switzerland

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