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Modeling the FIBOR/EURIBOR Swap Term Structure : An Empirical Approach

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  • Blaskowitz, Oliver J.
  • Herwartz, Helmut
  • de Cadenas Santiago, Gonzalo

Abstract

In this study we forecast the term structure of FIBOR/EURIBOR swap rates by means of recursive vector autoregressive (VAR) models. In advance, a principal components analysis (PCA) is adopted to reduce the dimensionality of the term structure. To evaluate ex?ante forecasting performance for particular short, medium and long term rates and for the level, slope and curvature of the swap term structure, we rely on measures of both statistical and economic performance. Whereas the statistical performance is investigated by means of the Henrikkson?Merton statistic, the economic performance is assessed in terms of cash flows implied by alternative trading strategies. Arguing in favor of local homogeneity of term structure dynamics, we propose a data driven, adaptive model selection strategy to ?predict the best forecasting model? out of a set of 100 alternative implementations of the PCA/VAR model. This approach is shown to outperform forecasting schemes relying on global homogeneity of the term structure. --

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Bibliographic Info

Paper provided by Christian-Albrechts-University of Kiel, Department of Economics in its series Economics Working Papers with number 2005,04.

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Date of creation: 2005
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Handle: RePEc:zbw:cauewp:2987

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Keywords: Principal components; Factor Analysis; Ex?ante forecasting; EURIBOR swap rates; Term structure; Trading strategies;

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  1. Driessen, Joost & Klaassen, Pieter & Melenberg, Bertrand, 2003. "The Performance of Multi-Factor Term Structure Models for Pricing and Hedging Caps and Swaptions," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 38(03), pages 635-672, September.
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  13. Elton, Edwin J & Gruber, Martin J & Blake, Christopher R, 1995. " Fundamental Economic Variables, Expected Returns, and Bond Fund Performance," Journal of Finance, American Finance Association, American Finance Association, vol. 50(4), pages 1229-56, September.
  14. Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, American Finance Association, vol. 52(4), pages 1287-1321, September.
  15. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 63(3), pages 415-441, March.
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Cited by:
  1. Oliver Blaskowitz & Helmut Herwatz, 2008. "Adaptive Forecasting of the EURIBOR Swap Term Structure," SFB 649 Discussion Papers SFB649DP2008-017, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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