Abstract
In this paper, we examined and compared the forecast performances of the dynamic Nelson–Siegel (DNS), dynamic Nelson–Siegel–Svensson (DNSS), and arbitrage-free Nelson–Siegel (AFNS) models after the financial crisis period. The best model for the forecast performance is the DNSS model in the middle and long periods. The AFNS is inferior to the DNS model for long-period forecasting. In U.S. bond markets, AFNS is shown to be superior to DNS in the U.S. However, for Japanese data, there is no evidence that the AFNS is superior to the DNS model in the long forecast horizon.
Highlights
After the financial crisis, the Japanese economy faced an economic environment unlike it had ever experienced before
In the forecasting the Japanese Government Bonds (JGB) yields of 3-month maturity and 1-year maturity, the cumulative of the squared errors of the Dynamic Nelson–Siegel (DNS) model shows the downward trend for long-forecast horizon
This study investigated the forecasting performances for yields by the DNS, dynamic Nelson–Siegel–Svensson (DNSS), and arbitrage-free Nelson–Siegel (AFNS) models
Summary
The Japanese economy faced an economic environment unlike it had ever experienced before. In January 2013, under the new governor of the central bank, the Bank of Japan began carrying out a new monetary policy framework. We examine and compare forecast performances for Japanese Government Bonds (JGB) from the financial crisis onwards. To analyze the dynamics of JGB yield, we adopt the Dynamic Nelson–Siegel (DNS), Dynamic Nelson–Siegel–Svensson (DNSS), and Arbitrage-free Nelson–Siegel (AFNS) models. The former two models are curve-fitting models, which do not impose theoretical fundamentals such as arbitrage pricing theory. If we can forecast the dynamics of the yield curve or term structure of interest rates, we may capture future fluctuations of the economic fundamentals.
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