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Forecasting Yield Curves Using Analyst's Views

Abstract: Fixed income analysts are accustomed to monitoring a few benchmark yields on a continuous basis and to providing point estimates for these yields, or for a combination of them. Yet, the optimisation of fixed income portfolios requires an accurate forecast of not only a few benchmark yields, but of complete yield curves. This paper derives a forecast of one or more yield curves that is consistent with an analyst's views. The model is based on a novel application of principal component analysis (PCA). It can be extended to other markets and has no restrictions on the number of forecast variables, or the number of analyst's views. We consider examples of forecasting the government bond yield curves of the United States, the Eurozone and the United Kingdom, simultaneously or not. Our results have direct implications for portfolio management.

Published on 5th September 2011
Authors Leonardo Nogueira
Series Reference 2009-03