Abstract

The Nelson–Siegel (NS) model is widely used in practice to fit the term structure of interest rates largely due to its high efficacy in the in-sample fit and out-of-sample forecasting of bond yields. In this paper, we compare forecasting performances of estimated yields from the Nelson–Siegel-based models and some simpler time series models, using the daily, weekly, and monthly data during a prolong period of liquidity trap in Japan. We find that the out-of-sample expanding window forecasts by NS-based models in general perform less satisfactory than the competitor models. However, the NS-based models can be useful in forecasting yields over longer horizons and can work well with GARCH-type structures in modeling the conditional volatility.

RAS ID

54862

Document Type

Journal Article

Date of Publication

1-1-2023

Funding Information

The Sumitomo Foundation

School

School of Business and Law

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Publisher

Wiley

Comments

Tsui, A. K., Wu, J., Zhang, Z., & Zheng, Z. (2023). Forecasting term structure of the Japanese bond yields in the presence of a liquidity trap. Journal of Forecasting, 42(5), 1205-1227.

. https://doi.org/10.1002/for.2952

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Link to publisher version (DOI)

10.1002/for.2952