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Evidence of long memory in short-term interest rates

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  • Margaret R. Maier

    (Department of Trade and Industry, London, UK)

  • Nigel Meade

    (The Business School, Imperial College London, UK)

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    Abstract

    The issues of non-stationarity and long memory of real interest rates are examined here. Autoregressive models allowing short-term mean reversion are compared with fractional integration models in terms of their ability to explain the behaviour of the data and to forecast out-of-sample. The data used are weekly observations of 3-month Eurodeposit rates for 10 countries, adjusted for inflation, for 14 years. Following Brenner, Harjes and Kroner, the volatility of these rates is shown to both exhibit GARCH effects and depend on the level of interest rates. Although relatively little support is found for the hypothesis of mean reversion, evidence of long memory in interest rate changes is found for seven countries. The out-of-sample forecasting performance for a year ahead of the fractional integrated models was significantly better than a no change. Copyright © 2003 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/for.873
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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

    Volume (Year): 22 (2003)
    Issue (Month): 8 ()
    Pages: 553-568

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    Handle: RePEc:jof:jforec:v:22:y:2003:i:8:p:553-568

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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    Cited by:
    1. John W. Galbraith & Greg Tkacz, 2007. "How Far Can Forecasting Models Forecast? Forecast Content Horizons for Some Important Macroeconomic Variables," Working Papers 07-1, Bank of Canada.
    2. Laurini, Márcio Poletti & Hotta, Luiz Koodi, 2013. "Indirect Inference in fractional short-term interest rate diffusions," Mathematics and Computers in Simulation (MATCOM), Elsevier, Elsevier, vol. 94(C), pages 109-126.
    3. Guglielmo Maria Caporale & Luis A. Gil-Alana, 2012. "Persistence and Cycles in the US Federal Funds Rate," CESifo Working Paper Series 4035, CESifo Group Munich.
    4. Holmes, Mark J. & Dutu, Richard & Cui, Xiaoman, 2009. "Real interest rates, inflation and the open economy: A regime-switching perspective on Australia and New Zealand," International Review of Economics & Finance, Elsevier, Elsevier, vol. 18(2), pages 351-360, March.

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