Improving market-based forecasts of short-term interest rates: time-varying stationarity and the predictive content of switching regime-expectations
- Modeling short-term interest rates as following regime-switching processes has become increasingly popular. Theoretically, regime-switching models are able to capture rational expectations of infrequently occurring discrete events. Technically, they allow for potential time-varying stationarity. After discussing both aspects with reference to the recent literature, this paper provides estimations of various univariate regime-switching specifications for the German three-month money market rate and bivariate specifications additionally including the term spread. However, the main contribution is a multi-step out-of-sample forecasting competition. It turns out that forecasts are improved substantially when allowing for state-dependence. Particularly, the informational content of the term spread for future short rate changes can be exploited optimally within a multivariate regime-switching framework.
| Author: | Ralf Ahrens |
|---|---|
| URN: | urn:nbn:de:hebis:30-9631 |
| Parent Title (German): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 1999,14 |
| Series (Serial Number): | CFS working paper series (1999, 14) |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 1999 |
| Year of first Publication: | 1999 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2005/06/13 |
| Tag: | forecasting; interest rates; peso problem; regime-switching; term structure |
| GND Keyword: | Nichtlineare Zeitreihenanalyse; Zinsfuß; Prognose |
| HeBIS-PPN: | 197809235 |
| Institutes: | Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| JEL-Classification: | C Mathematical and Quantitative Methods / C3 Multiple or Simultaneous Equation Models / C32 Time-Series Models; Dynamic Quantile Regressions (Updated!) |
| C Mathematical and Quantitative Methods / C5 Econometric Modeling / C53 Forecasting and Other Model Applications | |
| Licence (German): |  Deutsches Urheberrecht |
