Forecasting the term-structure of euro area swap rates and Austrian yields based on a dynamic Nelson-Siegel approach
Holler, Nebenführ, Radek – Working Paper 3 – September 2018
We employ an extended Nelson-Siegel model to produce a macro-financial framework for forecasting the euro area term-structure of interest rates and the Austrian yield curve, with a view to enabling risk management analyses and determining an optimal debt management strategy. We determine the dynamics of the term-structure by the movements of the level, slope and curvature parameters, influenced by the cyclical position of the economy and the price level. Long-term interest rates are based on the assumption that the level, slope and curvature of the yield curve and macroeconomic variables converge to their historic mean. Using in-sample and out-of-sample forecast benchmarking, we find that our model clearly outperforms the expectations hypothesis of the term-structure of the interest rates (forward rate) forecast, while a constant expectations (random walk) forecast appears to produce a superior out-of-sample performance, partly due to the existence of different policy regimes in our data sample. We then use our model to forecast the term-structure of euro area interest rates and the Austrian yield curve until 2028.