The Euro Area Yield Curve: An Analysis with Nelson-Siegel Type Models

Abstract

We present Nelson-Siegel-type yield curves for the Euro Area, by studying the in-sample fit and the out-of sample forecasting properties. Moreover, we add macro variables (output gap, EONIA and HICP or alternatively Eurocoin) to estimate the interactions with yield curve factors (level, slope and curvature), following the rationale of Diebold et al (2006). We use a two step procedure as in Diebold and Li (2006) and we find three interesting results. The Svensson model has better in-sample fit properties with respect to the Nelson-Siegel model. There exist interactions among both the level and the curvature with macroeconomic variables, while on the other hand, the slope interacts with all macroeconomic variables. The addiction of a business cycle indicator like Eurocoin gives better results with respect to both yields-only and alterative yields-macro models, confirming the success of parsimonious models for out-of sample forecasting.