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Forecasting the Government Bond Term Structure in Australia

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Australian Economic Papers

Published online on

Abstract

In this paper, we evaluate the performance of the dynamic Nielsen and Siegel interest rate model in forecasting Australian government bond yields. We compare a two‐stage OLS estimation procedure to a more powerful and robust state‐space framework estimated via a Kalman filter. We show that the one‐step approach generates smaller forecast errors than the two‐step procedure or a benchmark random walk model when forecasting the Australian government term structure across various horizons.