Can forward rates be used to improve interest rate forecasts?"
AbstractWe evaluate the extent to which the explanatory power detected in the term structure in different markets and countries can actually be used to produce sensible forecasts of future short-term interest rates. Specifically, in spite of the forecasting connotation of the unbiasedness property of forward rates, actual evaluation of their forecasting performance has received scant attention in the literature on the term structure. We use monthly data for 1978-1998 on interest rates on Eurodeposits on the US dollar, yen, Deutsche mark, British pound, Spanish peseta, French franc, Italian lira and Swiss franc, comparing forecasts obtained from forward rates to those obtained from univariate autoregressions. By themselves, forward rates produce better one-step ahead forecasts, as well as better once-and-for all forecasts of 1-month interest rates over a full year horizon than those obtained from the own past of interest rates. The gain in one-step ahead forecasting disappears for longer maturities, although forward rates still produce better once-and-for all predictions of 3- and 6-month interest rates than univariate autoregressions for a number of currencies.
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Bibliographic InfoPaper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales in its series Documentos del Instituto Complutense de Análisis Económico with number 0225.
Date of creation: 2002
Date of revision:
Expectations hypothesis; Term structure; Forward rates;
Other versions of this item:
- Emilio Dominguez & Alfonso Novales, 2002. "Can forward rates be used to improve interest rate forecasts?," Applied Financial Economics, Taylor & Francis Journals, vol. 12(7), pages 493-504.
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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