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Non-linear interest rate dynamics and forecasting: evidence for US and Australian interest rates

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Author Info
David G. McMillan (School of Management, University of St Andrews, UK)
Abstract

Recent empirical finance research has suggested the potential for interest rate series to exhibit non-linear adjustment to equilibrium. This paper examines a variety of models designed to capture these effects and compares both their in-sample and out-of-sample performance with a linear alternative. Using short- and long-term interest rates we report evidence that a logistic smooth-transition error-correction model is able to best characterize the data and provide superior out-of-sample forecasts, especially for the short rate, over both linear and non-linear alternatives. This model suggests that market dynamics differ depending on whether the deviations from long-run equilibrium are above or below the threshold value. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/ijfe.358
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 2 ()
Pages: 139-155
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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:2:p:139-155

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  2. Neftci, Salih N, 1984. "Are Economic Time Series Asymmetric over the Business Cycle?," Journal of Political Economy, University of Chicago Press, vol. 92(2), pages 307-28, April. [Downloadable!] (restricted)
  3. Brooks, Chris & Garrett, Ian, 2002. "Can We Explain the Dynamics of the UK FTSE 100 Stock and Stock Index Futures Markets?," Applied Financial Economics, Taylor and Francis Journals, vol. 12(1), pages 25-31, January. [Downloadable!] (restricted)
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  6. Gabriel Perez-Quiros & Allan Timmermann, 2000. "Firm Size and Cyclical Variations in Stock Returns," Journal of Finance, American Finance Association, vol. 55(3), pages 1229-1262, 06. [Downloadable!] (restricted)
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  7. David G. McMillan, 2001. "Non-Linear Predictability of Stock Market Returns: Evidence from Non-Parametric and Threshold Models," Discussion Paper Series, Department of Economics 0102, Department of Economics, University of St. Andrews.
  8. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
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  9. Falk, Barry, 1986. "Further Evidence on the Asymmetric Behavior of Economic Time Series over the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1096-1109, October. [Downloadable!] (restricted)
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  10. Clive W.J. Granger & Gawon Yoon, 2002. "Hidden Cointegration," University of California at San Diego, Economics Working Paper Series 2002-02, Department of Economics, UC San Diego. [Downloadable!]
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  11. Svensson, Lars E. O., 1999. "Inflation targeting as a monetary policy rule," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 607-654, June. [Downloadable!] (restricted)
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  12. Diebold, Francis X. & Nason, James A., 1990. "Nonparametric exchange rate prediction?," Journal of International Economics, Elsevier, vol. 28(3-4), pages 315-332, May. [Downloadable!] (restricted)
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  13. Enders, Walter & Siklos, Pierre L, 2001. "Cointegration and Threshold Adjustment," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(2), pages 166-76, April.
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  15. Beaudry, Paul & Koop, Gary, 1993. "Do recessions permanently change output?," Journal of Monetary Economics, Elsevier, vol. 31(2), pages 149-163, April. [Downloadable!] (restricted)
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