Forecasting negative yield‐curve distributions

Abstract

AbstractNegative interest rates have been present in various marketplaces since mid‐2014, following the negative interest rate policy (NIRP) adopted by the European Central Bank to raise economic growth. The well‐known historical approach (HA) appears to be a good resource. By tweaking the HA, we derive a very tractable data‐driven tool that allows practitioners to generate yield‐curve distributions at future discrete time horizons. We thereby provide a robust and easy‐to‐understand forecasting model, suitable for the NIRP context, allowing an appreciation of its predictive power. Besides the methodological development herein, various numerical illustrations are presented to shed light on the benefits (and limitations) of this forecasting approach.