Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152978
Authors: 
Mönch, Emanuel
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 544
Abstract: 
This paper suggests a term structure model which parsimoniously exploits a broad macroeconomic information set. The model does not incorporate latent yield curve factors, but instead uses the common components of a large number of macroeconomic variables and the short rate as explanatory factors. Precisely, an affine term structure model with parameter restrictions implied by no-arbitrage is added to a Factor-Augmented Vector Autoregression (FAVAR). The model is found to strongly outperform different benchmark models in out-of-sample yield forecasts, reducing root mean squared forecast errors relative to the random walk up to 50% for short and around 20% for long maturities.
Subjects: 
Affine term structure models
Dynamic Factor Models
FAVAR
yield curve
JEL: 
C13
C32
E43
E44
E52
Document Type: 
Working Paper

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