Abstract
This paper compares the accuracy of interest rates forecasts from dynamic, affine yield curve models, also those that take into account the correlation of latent factors and macroeconomic variables. The empirical results suggest that the affine models are better in explaining future movements in interest rates than the benchmark, arbitrage-free model. Moreover, we show that interest rates forecasts conditional on the realization of inflation and the unemployment rate are more accurate than unconditional forecasts.
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