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

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Author Info
Blaskowitz, Oliver
Herwartz, Helmut
de Cadenas Santiago, Gonzalo

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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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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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Web page: http://www.wiso.uni-kiel.de/econ/

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Related research
Keywords: Principal components Factor Analysis Ex–ante forecasting EURIBOR swap rates Term structure Trading strategies

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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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  1. Duffie, Darrell & Singleton, Kenneth J, 1997. " An Econometric Model of the Term Structure of Interest-Rate Swap Yields," Journal of Finance, American Finance Association, vol. 52(4), pages 1287-1321, September. [Downloadable!] (restricted)
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    Other versions:
  3. Robert R. Bliss, 1997. "Movements in the term structure of interest rates," Economic Review, Federal Reserve Bank of Atlanta, issue Q 4, pages 16-33. [Downloadable!]
  4. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, 02. [Downloadable!] (restricted)
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  8. Wolfgang Hardle & Helmut Herwartz & Vladimir Spokoiny, 2003. "Time Inhomogeneous Multiple Volatility Modeling," Journal of Financial Econometrics, Oxford University Press, vol. 1(1), pages 55-95.
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  9. Henriksson, Roy D & Merton, Robert C, 1981. "On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills," Journal of Business, University of Chicago Press, vol. 54(4), pages 513-33, October. [Downloadable!] (restricted)
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  11. Driessen, J. & Klaassen, P. & Melenberg, B., 2000. "The performance of multi-factor term structure models for pricing and hedging caps and swaptions," Discussion Paper 93, Tilburg University, Center for Economic Research. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Markus Fischer & Markus Reiss, 2005. "Discretisation of Stochastic Control Problems for Continuous Time Dynamics with Delay," SFB 649 Discussion Papers SFB649DP2005-038, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Dec 2005. [Downloadable!]
  2. Oliver Blaskowitz & Helmut Herwatz, . "Adaptive Forecasting of the EURIBOR Swap Term Structure," SFB 649 Discussion Papers SFB649DP2008-017, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  3. Markus Krätzig, 2005. "A Software Framework for Data Based Analysis," SFB 649 Discussion Papers SFB649DP2005-044, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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  7. Benjamin Bental & Dominique Demougin, 2005. "Do Factor Shares Reflect Technology?," SFB 649 Discussion Papers SFB649DP2005-050, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  8. Yasemin Boztug & Lutz Hildebrandt, 2005. "An empirical test of theories of price valuation using a semiparametric approach, reference prices, and accounting for heterogeneity," SFB 649 Discussion Papers SFB649DP2005-057, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  9. Christian Weiner, 2005. "The Impact of Industry Classification Schemes on Financial Research," SFB 649 Discussion Papers SFB649DP2005-062, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  10. Yasemin Boztug & Lutz Hildebrandt, 2005. "A Market Basket Analysis Conducted with a Multivariate Logit Model," SFB 649 Discussion Papers SFB649DP2005-028, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  11. Astrid Matthey, 2005. "Getting Used to Risks: Reference Dependence and Risk Inclusion," SFB 649 Discussion Papers SFB649DP2005-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  12. Wolfgang Härdle & Sigbert Klinke & Uwe Ziegenhagen, 2005. "Integrable e-lements for Statistics Education," SFB 649 Discussion Papers SFB649DP2005-058, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
  13. Anja Schöttner, 2005. "Fixed-Prize Tournaments versus First-Price Auctions in Innovation Contests," SFB 649 Discussion Papers SFB649DP2005-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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