Yield Curve Predictability, Regimes, and Macroeconomic Information: A Data-Driven Approach

We propose an empirical approach to determine the various economic sources driving the US yield curve. We allow the conditional dynamics of the yield at different maturities to change in reaction to past information coming from several relevant predictor variables. We consider both endogenous, yield curve factors and exogenous, macroeconomic factors as predictors in our model, letting the data themselves choose the most important variables. We find clear, different economic patterns in the local dynamics and regime specification of the yields depending on the maturity. Moreover, we present strong empirical evidence for the accuracy of the model in fitting in-sample and predicting out-of-sample the yield curve in comparison to several alternative approaches.