The dynamics of long forward rate term structures

In this article, we look at study the dynamics of forward rates with maturities longer than 14 years. We re‐document the phenomenon of the downward sloping long forward rate term structure using U.S. Treasury STRIPS data over the period 1988 to 2007. By calibrating Diebold F. X. and Li C.‐L.'s (<link href="#bib16">2006</link>) dynamic Nelson C. R. and Siegel A. F. (<link href="#bib30">1987</link>) and Christensen J. H. E., Diebold F. X., and Rudebusch G. D.'s (<link href="#bib8">2007</link>) arbitrage‐free Nelson‐Siegel models, we find that both models explain the empirical phenomenon very well. Out‐of‐sample comparison shows that imposing no‐arbitrage restriction indeed improves the forecasting performance. © 2010 Wiley Periodicals, Inc. Jrl Fut Mark 30:957–982, 2010