Empirical Analysis and Forecasting of Multiple Yield Curves

Abstract In this paper we perform a thorough empirical study of tenor-dependent term structures which reveals important cross-tenor dependencies of yields as a persistent feature of post-crisis interest rate markets. Based on this analysis, we develop tractable dynamic factor models to forecast multiple yield curves. We show that our method outperforms existing single-curve forecasting methods by taking into account the connections between rates of different tenor structures. Our results have important implications e.g. for risk management in finance and insurance as the disregard of tenor dependencies may lead to an underestimation of risks.