Forecasting the US Term Structure of Interest Rates Using Nonparametric Functional Data Analysis

In this paper we consider a novel procedure to forecasting the US zero coupon bond yields for a continuum of maturities by using the methodology of nonparametric functional data analysis (NP‐FDA). We interpret the US yields as curves since the term structure of interest rates defines a relation between the yield of a bond and its maturity. Within the NP‐FDA approach, each curve is viewed as a functional random variable and the dynamics present in the sample are modeled without imposing any parametric structure. In order to evaluate forecast the performance of the proposed estimator, we consider forecast horizons h = 1,3,6,12… months and the results are compared with widely known benchmark models. Our estimates with NP‐FDA present predictive performance superior to its competitors in many situations considered, especially for short‐term maturities.