Domínguez, Emilio and Novales Cinca, Alfonso (2002) Can forward rates be used to improve interest rate forecasts? [Working Paper or Technical Report]
Official URL: http://eprints.ucm.es/7687/
We evaluate the extent to which the explanatory power detected in the term structure in different markets and countries can actually be used to produce sensible forecasts of future short-term interest rates. Specifically, in spite of the forecasting connotation of the unbiasedness property of forward rates, actual evaluation of their forecasting performance has received scant attention in the literature on the term structure. We use monthly data for 1978-1998 on interest rates on Eurodeposits on the US dollar, yen, Deutsche mark, British pound, Spanish peseta, French franc, Italian lira and Swiss franc, comparing forecasts obtained from forward rates to those obtained from univariate autoregressions. By themselves, forward rates produce better one-step ahead forecasts, as well as better once-and-for all forecasts of 1-month interest rates over a full year horizon than those obtained from the own past of interest rates. The gain in one-step ahead forecasting disappears for longer maturities, although forward rates still produce better once-and-for all predictions of 3- and 6-month interest rates than univariate autoregressions for a number of currencies.
|Item Type:||Working Paper or Technical Report|
|Additional Information:||JEL Classification: E37, E43|
|Uncontrolled Keywords:||Expectations hypothesis, Term structure, Forward rates|
|Subjects:||Social sciences > Economics > Stock exchanges|
|Series Name:||Documentos de trabajo del Instituto Complutense de Análisis Económico (ICAE)|
Campbell, J.Y. and Shiller, R.J., 1987, Cointegration and test of present value models", Journal of Political Economy 95, 1062-1088.
Campbell, J.Y. and Shiller, R.J., 1991, Yield spreads and interest rates movements: A bird's eye view, Review of Economic Studies, 58, 495-514.
Deaves, R., 1996, Forecasting Canadian short-term interest rates, Canadian Journal of Economics, 29, 615-634.
Fama, E., 1976, Forward rates as predictors of future spot rates, Journal of Financial Economics, 13, 509-528.
Fama, E., 1984, The information in the term structure, Journal of Financial Economics, 13, 509-528.
Fama, E., 1990, Term structure forecasts of interest rates, inflation and real returns, Journal of Monetary Economics, 25, 59-76.
Fama, E., and Bliss, R., 1987, The information in long maturity forward rates, American Economic Review, 77, 680-692.
Jorion, P. and Mishkin, F., 1991, A multicountry comparison of term-structure forecasts at long horizons, Journal of Financial Economics, 29, 59-80.
Mankiw, N. and Miron, J.A., 1986, The changing behavior of the term structure of interest rates, The Quarterly Journal of Economics, 101, 211-228.
Mankiw, N. and Summers, L.H., 1984, Do long term rates overreact to short-term interest rates?, Brookings Papers on Economic Activity, 1, 223-242.
Mishkin, F, 1988, The information in the term structure: Some further results, Journal of Applied Econometrics, 3, 307-314.
Park, T.H. and Switzer, L.N., 1997, Forecasting interest rates and yield spreads: the information content of implied futures yields and best-fitting forward rate models, Journal of Forecasting, 16, 209-224.
Shiller, R.J., 1990, The term structure of interest rates, in B.Friedman and F.Hahn (eds.), Handbook of Monetary Economics, North-Holland, Amsterdam.
Shiller, R.J., Campbell, J.Y., and Schoenholtz, K.L., 1983, Forward rates and future policy: interpreting the term structure of interest rates, Brookings Papers on Economic Activity, 1, 173-217.
Wahab, M., 1997, On risk, rationality and the predictive ability of European short-term adjusted yield spreads, Journal of International Money and Finance, 25, 29-46.
|Deposited On:||04 Mar 2008|
|Last Modified:||26 Jun 2012 13:21|
Repository Staff Only: item control page