Recent studies documented a sufficient forecasting performance of shadow-rate models in the low yields environment. Moreover, it has been shown that including the macro-variables into the shadow-rate models further improves the results. We build on these findings and evaluate for the U.S. Treasury yields, whether the lower bound proximity was truly the only issue to reflect in the interest rate modeling since the Great Recession. Surprisingly, we discover that the relative importance of yield curve factors has changed as well. More specifically, instead of macroeconomic factors, financial market sentiment factors became dominant since the recent financial turmoil. Based on such finding, we show, that extending the macro-finance interest rate models by financial market sentiment proxies further improves the forecasting performance.
interest rate yield curve macro-finance model affine model Nelson-Siegel