Term Structure Forecasting Using Macro Factors And Forecast Combination

Date Added: Jan 2010
Format: PDF

The authors examine the importance of incorporating macroeconomic information and, in particular, accounting for model uncertainty when forecasting the term structure of U.S. interest rates. They start off by analyzing and comparing the forecast performance of several individual term structure models. Their 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. They 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.