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Forecasts of US Short-term Interest Rates: A Flexible Forecast Combination Approach

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  • Guidolin, Massimo
  • Timmermann, Allan G

Abstract

This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6188.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6188

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Keywords: forecast combinations; term structure of interest rates;

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References

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Citations

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Cited by:
  1. Massimo Guidolin & Stuart Hyde, 2008. "Equity portfolio diversification under time-varying predictability and comovements: evidence from Ireland, the US, and the UK," Working Papers 2008-005, Federal Reserve Bank of St. Louis.
  2. Sadayuki Ono, 2007. "Term Structure Dynamics in a Monetary Economy with Learning," Discussion Papers 07/29, Department of Economics, University of York.
  3. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2011. "Combining Predictive Densities using Bayesian Filtering with Applications to US Economics Data," Tinbergen Institute Discussion Papers 11-003/4, Tinbergen Institute.
  4. Apostolos Thomadakis, 2012. "Contagion or Flight-to-Quality Phenomena in Stock and Bond Returns," School of Economics Discussion Papers 0612, School of Economics, University of Surrey.
  5. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2011. "Combining Predictive Densities using Nonlinear Filtering with Applications to US Economics Data," Tinbergen Institute Discussion Papers 11-172/4, Tinbergen Institute.
  6. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2010. "Combining predictive densities using Bayesian filtering with applications to US economics data," Working Paper 2010/29, Norges Bank.
  7. Massimo Guidolin, 2011. "Markov Switching Models in Empirical Finance," Working Papers 415, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  8. Massimo Guidolin & Daniel L. Thornton, 2010. "Predictions of short-term rates and the expectations hypothesis," Working Papers 2010-013, Federal Reserve Bank of St. Louis.
  9. Miguel Belmonte & Gary Koop, 2013. "Model Switching and Model Averaging in Time-Varying Parameter Regression Models," Working Papers 1302, University of Strathclyde Business School, Department of Economics.
  10. De Pooter, Michiel & Ravazzolo, Francesco & van Dijk, Dick, 2006. "Predicting the term structure of interest rates incorporating parameter uncertainty, model uncertainty and macroeconomic information," MPRA Paper 2512, University Library of Munich, Germany, revised 03 Mar 2007.
  11. Michiel D. de Pooter & Francesco Ravazzolo & Dick van Dijk, 2007. "Predicting the Term Structure of Interest Rates: Incorporating Parameter Uncertainty, Model Uncertainty and Macroeconomic Information," Tinbergen Institute Discussion Papers 07-028/4, Tinbergen Institute.
  12. Elena Andreou & Eric Ghysels & Constantinos Kourouyiannis, 2012. "Robust volatility forecasts in the presence of structural breaks," University of Cyprus Working Papers in Economics 08-2012, University of Cyprus Department of Economics.
  13. Monica Billio & Roberto Casarin & Francesco Ravazzolo & Herman K. van Dijk, 2012. "Time-varying Combinations of Predictive Densities using Nonlinear Filtering," Tinbergen Institute Discussion Papers 12-118/III, Tinbergen Institute.
  14. Massimo Guidolin & Stuart Hyde & David McMillan & Sadayuki Ono, 2009. "Non-linear predictability in stock and bond returns: when and where is it exploitable?," Working Papers 2008-010, Federal Reserve Bank of St. Louis.

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