Forecasting the yield curve - Forecast performance of the dynamic Nelson-Siegel model from 1971 to 2008

We define a parameter representing the relative forecast performance to compare forecasting results of different methods. By using this parameter, we analyze the performance of the dynamic Nelson-Siegel model and, for comparison, the first order autoregressive (AR(1)) model applied to a set of US bond yield data that covers a time span from November 1971 to December 2008. As a reference, we take the random walk model applied to the yield data. Our findings indicate that none of the models can convincingly beat the random walk model. Furthermore, there is no advantage in using the more advanced and complicated dynamic Nelson-Siegel model over a simple AR(1) model.