Predicting Short-Term Interest Rates: Does Bayesian Model Averaging Provide Forecast Improvement?
AbstractThis paper examines the forecasting qualities of Bayesian Model Averaging (BMA) over a set of single factor models of short-term interest rates. Using weekly and high frequency data for the one-month Eurodollar rate, BMA produces predictive likelihoods that are considerably better than the majority of the short-rate models, but marginally worse off than the best model in each dataset. We observe preference for models incorporating volatility clustering for weekly data and simpler short rate models for high frequency data. This is contrary to the popular belief that a diffusion process with volatility clustering best characterizes the short rate.
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Bibliographic InfoPaper provided by Melbourne Institute of Applied Economic and Social Research, The University of Melbourne in its series Melbourne Institute Working Paper Series with number wp2011n01.
Length: 41 pages
Date of creation: Jan 2011
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Bayesian model averaging; out-of-sample forecasts;
Find related papers by JEL classification:
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-08-09 (All new papers)
- NEP-CBA-2011-08-09 (Central Banking)
- NEP-FOR-2011-08-09 (Forecasting)
- NEP-MST-2011-08-09 (Market Microstructure)
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