Chung, TszKin and Iiboshi, Hirokuni (2015): Prediction of Term Structure with Potentially Misspecified MacroFinance Models near the Zero Lower Bound.

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Abstract
In this paper, we study the forecasting performances of the affine term structure model (ATSM) and the quadratic term structure model (QTSM) with macrofinance features under the zero interest rate policy of Japan. As both the two models can be potentially misspecified, we adopt the pptimal pooling prediction scheme following the recent work by Geweke and Amisano (2011). We find that the QTSM provides a more realistic statistical description when bond yields are close to the zero lower bound. The ATSM gives a good fit to the macroeconomic variables and bond yields simultaneously, however, it predicts a large probability of negative interest rates and hence is not appropriate for the forecasting of bond yields. The Markovswitching prediction pool dominates individual models as well as the static and dynamic pools. Our results suggest that both of the ATSM and QTSM macrofinance models are potentially misspecified and one should use a combination of the two models for the prediction of future bond yields during different time periods. Our analysis sheds light on the macrofinance modeling using US data amid the Federal Reserve’s zero interest rate policy since December 2008.
Item Type:  MPRA Paper 

Original Title:  Prediction of Term Structure with Potentially Misspecified MacroFinance Models near the Zero Lower Bound 
Language:  English 
Keywords:  Term structure; Forecasting; Financial markets and the macroeconomy; Optimal pool; Dynamic prediction pool; Markovswitching mixture; Bayesian estimation 
Subjects:  C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C54  Quantitative Policy Modeling E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E43  Interest Rates: Determination, Term Structure, and Effects E  Macroeconomics and Monetary Economics > E4  Money and Interest Rates > E44  Financial Markets and the Macroeconomy 
Item ID:  85709 
Depositing User:  Professor Hirokuni Iiboshi 
Date Deposited:  05 Apr 2018 15:16 
Last Modified:  29 Sep 2019 00:46 
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URI:  https://mpra.ub.unimuenchen.de/id/eprint/85709 