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Dynamic term structure models with score-driven time-varying parameters: estimation and forecasting

Author

Listed:
  • Siem Koopman

    (Vrije Universiteit Amsterdam, Tinbergen Institute)

  • AndrĂ© Lucas

    (Vrije Universiteit Amsterdam, Tinbergen Institute)

  • Marcin Zamojski

    (University of Gothenburg)

Abstract
We consider score-driven time-varying parameters in dynamic yield curve models and investigate their in-sample and out-of-sample performance for two data sets. In a univariate setting, score-driven models were shown to offer competitive performance to parameter-driven models in terms of in-sample fit and quality of out-of-sample forecasts but at a lower computational cost. We investigate whether this performance and the related advantages extend to more general and higher-dimensional models. Based on an extensive Monte Carlo study, we show that in multivariate settings the advantages of score-driven models can even be more pronounced than in the univariate setting. We also show how the score-driven approach can be implemented in dynamic yield curve models and extend them to allow for the fat-tailed distributions of the disturbances and the time-variation of variances (heteroskedasticity) and covariances.

Suggested Citation

  • Siem Koopman & AndrĂ© Lucas & Marcin Zamojski, 2017. "Dynamic term structure models with score-driven time-varying parameters: estimation and forecasting," NBP Working Papers 258, Narodowy Bank Polski.
    • Handle: RePEc:nbp:nbpmis:258
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    More about this item

    Keywords

    term-structure; dynamic Nelson-Siegel models; non-Gaussian distributions; time-varying parameters; observation-driven models; parameter-driven models;
    All these keywords.

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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