Modelling the yield curve based on a partial conjecture of future yields

Bachelor Thesis from the year 2016 in the subject Business economics - Operations Research grade: 8 University of Groningen language: English abstract: The reader is introduced to term structure modelling using the Dynamic Nelson-Siegel model. Assuming an independent and correlated specification for its factors we estimate the factor dynamics by maximum likelihood. Additionally estimation of the factors is done by Kalman filtering. We derive a closed-form distribution for future factors forecast them and present the insample and out-of-sample forecasts. As a useful addition we discuss the main finding of the thesis namely a stochastic model for the predicted yield curve when a future yield with certain maturity is given.