Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/209946 
Year of Publication: 
2010
Series/Report no.: 
Working Paper No. 2010/01
Publisher: 
Norges Bank, Oslo
Abstract: 
We examine the importance of incorporating macroeconomic information and, in particular, accounting for model uncertainty when forecasting the term structure of U.S.interest rates. We start off by analyzing and comparing the forecast performance of several individual term structure models. Our results confirm and extend results found in previous literature that adding macroeconomic information, through factors extracted from a large number of individual series, tends to improve interest rate forecasts. We then show, however, that the predictive power of individual models varies over time significantly. Models with macro factors are the more accurate in and around recession periods. Models without macro factors do particularly well in low-volatility subperiods such as the late 1990s. We demonstrate that this problem of model uncertainty can be mitigated by combining individual model forecasts. Combining forecasts leads to encouraging gains in predictability, especially for longer-dated maturities, and importantly, these gains are consistent over time.
Subjects: 
Nelson-Siegel model
term structure of interest rates
affine term structure model
macro factors
forecast combination
model confidence set
JEL: 
C5
C11
C32
E43
E47
Persistent Identifier of the first edition: 
ISBN: 
978-82-7553-539-7
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Working Paper
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