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Nonlinear Nonparametric Prediction of the 90-Day T-Bill Rate

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Author Info

  • John Barkoulas

    ()
    (Boston College)

  • Christopher F. Baum

    ()
    (Boston College)

  • Joseph Onochie

    (Baruch College)

Abstract

We employ a nonlinear, nonparametric method to model the stochastic behavior of changes in the 90-day U.S. T-bill rate. The estimation technique is locally weighted regression (LWR), a nearest-neighbor method, and the forecasting criteria are the root mean square error (RMSE) and mean absolute deviation (MAD). We compare the forecasting performance of the nonparametric fit to the performance of two benchmark linear models: an autoregressive model and a random-walk-with-drift model. The nonparametric fit results in significant improvements in forecasting accuracy as compared to benchmark linear models both in-sample and out-of-sample, thus establishing the presence of substantial nonlinear mean predictability of changes in the 90-day T-bill rate.

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File URL: http://fmwww.bc.edu/EC-P/wp320.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 320..

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Length: 26 pages
Date of creation: 01 Jan 1996
Date of revision:
Publication status: published, Review of Financial Economics, 1997, 6:2, 187-198.
Handle: RePEc:boc:bocoec:320

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Phone: 617-552-3670
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Web page: http://fmwww.bc.edu/EC/
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Keywords: interest rates; T-bill rate; forecasting; long memory;

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References

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