Forecasting the term structure when short-term rates are near zero

James M. Steeley*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


This paper compares the experience of forecasting the UK government bond yield curve before and after the dramatic lowering of short-term interest rates from October 2008. Out-of-sample forecasts for 1, 6 and 12 months are generated from each of a dynamic Nelson-Siegel model, autoregressive models for both yields and the principal components extracted from those yields, a slope regression and a random walk model. At short forecasting horizons, there is little difference in the performance of the models both prior to and after 2008. However, for medium- to longer-term horizons, the slope regression provided the best forecasts prior to 2008, while the recent experience of near-zero short interest rates coincides with a period of forecasting superiority for the autoregressive and dynamic Nelson-Siegel models.

Original languageEnglish
Pages (from-to)350-363
Number of pages14
JournalJournal of Forecasting
Issue number5
Early online date9 May 2014
Publication statusPublished - 28 Jul 2014


  • UK bond market
  • yield curve
  • zero lower bound


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