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Dynamic correlations and forecasting of term structure slopes in eurocurrency market

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Abstract

Using monthly data on Euro-rates for 1979-1998, we examine the extent to which crosscountry information on term structure slopes can be used to improve upon univariate slope forecasts. This is interesting from the point of view of forecasting economic activity, since term structure slopes are known to anticipate fluctuations in the real economy. Additionally, the Expectations Hypothesis states that the term structure slope summarizes the available information which is relevant for forecasting future short-term interest rates, so that improved slope forecasts might also lead to better forecasts of future interest rates. We find ample evidence of significant explanatory power in term structure slopes across countries. Besides, we document that this information content leads to improved forecasts of the term structure slope in some countries, using a foreign slope as indicator.

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Paper provided by Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico in its series Documentos de Trabajo del ICAE with number 0226.

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Length: 15 pages
Date of creation: 2002
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Handle: RePEc:ucm:doicae:0226

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Keywords: Term structure of interest rates; Term structure slope; Expectations hypothesis; Eurocurrencies.;

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  1. Arturo Estrella & Gikas A. Hardouvelis, 1989. "The term structure as a predictor of real economic activity," Research Paper, Federal Reserve Bank of New York 8907, Federal Reserve Bank of New York.
  2. Katsimbris, George M & Miller, Stephen M, 1993. "Interest Rate Linkages within the European Monetary System: Further Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(4), pages 771-79, November.
  3. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, Elsevier, vol. 33(1), pages 133-155, February.
  4. Karfakis, C. J. & Moschos, D.M., 1990. "Interest Rate Linkages Within the European Monetary System: A Time Series Analysis," Working Papers, University of Sydney, School of Economics 144, University of Sydney, School of Economics.
  5. repec:fth:sydnec:144 is not listed on IDEAS
  6. Hagen, Jurgen von & Fratianni, Michele, 1990. "German dominance in the EMS: evidence from interest rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 9(4), pages 358-375, December.
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