Forecasting the yield curve in a data-rich environment: A no-arbitrage factor-augmented VAR approach

Does a lot help a lot? Forecasting stock returns with pooling strategies in a data‐rich environment

“…Factor-augmented regression settings are used by Stock and Watson (2002a) and Forni, Hallin, Lippi, and Reichlin (2003) to reveal the predictive performance of latent common components for output growth and inflation. Ludvigson and Ng (2009) successfully used factor decomposition for risk premium prediction on the bond market, and Moench (2008) considered factor-augmented forecasts for the yield curve. Next to Ludvigson and Ng (2009), our approach bears a strong resemblance to Ludvigson and Ng (2007), Cakmakli and van Dijk (2016), and Neely et al (2014), who analyze the forecasting performance of latent common components for the equity premium and its volatility.…”

Prediction bias correction for dynamic term structure models

“…The time series aspect of the model in (2) describes the dynamics of the low dimensional vector of factors. It is common practice to use three factors for the yield curve (DL, 2006, Mönch, 2008, Tobias et al, 2012 for a recent counter example).…”

“…More recently, Duffee (2011) finds that imposing no-arbitrage restrictions does not improve forecasting performance. Mönch (2008), De Pooter et al (2010 and Exterkate et al (2012) add macro variables and document that they contain predictive information for the curve.…”

Forecasting the US term structure of interest rates using a macroeconomic smooth dynamic factor model

“…Recent literature has shown the strong relation between the yield curve and macroeconomic developments; see, for example, Ang and Piazzesi (2003) and Diebold, Rudebusch, and Aruoba (2006). It has given a renewed focus on using macroeconomic information in forecasting the yield curve; see, for example, Moench (2008) and Exterkate, Van Dijk, Heij, and Groenen (2010). We construct a dynamic factor model for a joint likelihood-based analysis of the term structure of interest rates and a large panel of macroeconomic series.…”