Title

The term structure of government bond yields in an emerging market

Author Affiliation

Wali Ullah is Associate Professor at the Department of Economics and Finance, Institute of Business Administration (IBA), Karach .

Khadija Malik Bari is Assistant Professor at the Department of Economics and Finance, Institute of Business Administration (IBA), Karachi

Faculty / School

Faculty of Business Administration (FBA)

Department

Department of Economics

Was this content written or created while at IBA?

Yes

Document Type

Article

Source Publication

Romanian Journal of Economic Forecasting

ISSN

1582-6163

Abstract

The accurate modeling of the term structure of interest rates is of vital importance in macroeconomics and finance in general and in the context of monetary policy in particular, as its factors are important in predicting future growth and inflation. This paper investigates the extent to which the so called Nelson-Siegel model (DNS) and its extended version that accounts for time varying volatility (DNS-GARCH and DNS-EGARCH) can optimally fit the yield curve and predict its future path in the context of an emerging economy. The study expands the earlier work (Koopman, et al. 2010) by looking at more elaborate specifications for volatility modeling such as E-GARCH and also evaluates the predictive role of considering the time-varying volatility in the model in terms of out-of-sample forecasting. For the in-sample fit, all three models fit the curve remarkably well even in the emerging markets. However, the DNS-EGARCH model fits the curve slightly better than the other two models. Moreover, all three specifications of the yield curve that are based on the Nelson-Siegel functional form, outperform the benchmark AR(1) forecasts at all three specified forecast horizons. The DNS comes with more precise forecasts than the volatility based extended models for the 1-month ahead forecasts, while the other two outperform the standard DNS for 6-and 12-month horizons.

Indexing Information

HJRS - X Category, Scopus, Web of Science - Social Sciences Citation Index (SSCI)

Journal Quality Ranking

Impact Factor: 0.756

Publication Status

Published

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