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Adaptive Forecasting of the EURIBOR Swap Term Structure

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Author Info
Oliver Blaskowitz
Helmut Herwatz

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Abstract

In this paper we adopt a principal components analysis (PCA) to reduce the dimensionality of the term structure and employ autoregressive models (AR) to forecast principal components which, in turn, are used to forecast swap rates. Arguing in favor of structural variation, we propose data driven, adaptive model selection strategies based on the PCA/AR model. To evaluate ex-ante forecasting performance for particular rates, different forecast features such as mean squared errors, directional accuracy and big hit ability are considered. It turns out that relative to benchmark models, the adaptive approach offers additional forecast accuracy in terms of directional accuracy and big hit ability.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-017.

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Length: 29 pages
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Handle: RePEc:hum:wpaper:sfb649dp2008-017

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Related research
Keywords: Principal components ex ante forecasting EURIBOR swap rates term structure directional accuracy big hit ability

Find related papers by JEL classification:
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
G29 - Financial Economics - - Financial Institutions and Services - - - Other

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    Other versions:
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    Other versions:
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