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Are levels effects important in out-of-sample performance of short rate models?

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  • Suardi, Sandy

Abstract

This paper derives short-term interest rate volatility forecasts from various interest rate models. While models that specify both GARCH and levels effects are superior in their forecasts accuracy, they systematically under predict interest rate volatility more frequently than simple short rate models.

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File URL: http://www.sciencedirect.com/science/article/B6V84-4P37JC2-K/1/9a441858f52fe09338f2273cf9c98690
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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 99 (2008)
Issue (Month): 1 (April)
Pages: 181-184

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Handle: RePEc:eee:ecolet:v:99:y:2008:i:1:p:181-184

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Web page: http://www.elsevier.com/locate/ecolet

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References

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  1. Brailsford, Timothy J. & Faff, Robert W., 1996. "An evaluation of volatility forecasting techniques," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 419-438, April.
  2. Nissen, F. & Koedijk, C.F. & Wolff, C.C.P., 1997. "The dynamics of short term interest rate volatility reconsidered," Open Access publications from Maastricht University urn:nbn:nl:ui:27-5919, Maastricht University.
  3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  4. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 85-107, March.
  5. Bali, Turan G., 2000. "Testing the Empirical Performance of Stochastic Volatility Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 191-215, June.
  6. Dothan, L. Uri, 1978. "On the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 6(1), pages 59-69, March.
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Cited by:
  1. Chew Lian Chua & Sandy Suardi & Sarantis Tsiaplias, 2011. "Predicting Short-Term Interest Rates: Does Bayesian Model Averaging Provide Forecast Improvement?," Melbourne Institute Working Paper Series wp2011n01, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.

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