The forecasting power of internal yield curve linkages

This paper investigates whether information from foreign yield curves helps forecast domestic yieldcurves out-of-sample. A nested methodology to forecast yield curves in domestic and internationalsettings is applied on three major countries (the US, Germany and the UK). This novel methodologyis based on dynamic factor models, the EM algorithm and the Kalman …lter. The domestic modelis compared vis-á-vis an international one, where information from foreign yield curves is allowed toenrich the information set of the domestic yield curve. The results have interesting and original im-plications. They reveal clear international dependency patterns...