The information in the term structure: A non-parametric investigation

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Abstract

This paper proposes a non-linear term structure model that nests the discrete and continuous time models as special cases. I estimate the model non-parametrically using nearest-neighbours regression. In sample, the non-linear model matches the standard theories, but out of sample, it offers substantial improvement. Linear models fail to track future interest rates: a random walk dominates the forward rate as a predictor for 3-month Treasury bills. A non-linear forecast based on the spread is shown statistically to be the best forecast.

Original languageEnglish (US)
Pages (from-to)137-153
Number of pages17
JournalJournal of Forecasting
Volume15
Issue number3
DOIs
StatePublished - Apr 1996

All Science Journal Classification (ASJC) codes

  • Modeling and Simulation
  • Computer Science Applications
  • Strategy and Management
  • Statistics, Probability and Uncertainty
  • Management Science and Operations Research

Keywords

  • Interest rates
  • Nearest neighbours
  • Non-linear
  • Non-parametric
  • Term structure

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