Abstract

We examine the statistical term structure model of cochrane and Piazzesi (2005) and its affine counterpart, developed in cochrane and Piazzesi (2008) in several out-of-sample analyzes. The model’s one-factor forecasting structure characterizes the term structures of additional currencies in samples ending in 2003. In post-2003 data one-factor structures again characterize each currency’s term structure, but we reject equality of the coefficients across the two samples. We derive some implications of the affine model for the predictability of cross-currency investments, but we find little support for these predictions in either pre-2004 or post-2003 data. The models’ forecasts fail to beat historical average return forecasts of excess rates of return for bonds and currencies in recursive out-of-sample analyses.