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Non-linear interest rate dynamics and forecasting: evidence for US and Australian interest rates

  • David G. McMillan

    (School of Management, University of St Andrews, UK)

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    Recent empirical finance research has suggested the potential for interest rate series to exhibit non-linear adjustment to equilibrium. This paper examines a variety of models designed to capture these effects and compares both their in-sample and out-of-sample performance with a linear alternative. Using short- and long-term interest rates we report evidence that a logistic smooth-transition error-correction model is able to best characterize the data and provide superior out-of-sample forecasts, especially for the short rate, over both linear and non-linear alternatives. This model suggests that market dynamics differ depending on whether the deviations from long-run equilibrium are above or below the threshold value. Copyright © 2007 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/ijfe.358
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    Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

    Volume (Year): 14 (2009)
    Issue (Month): 2 ()
    Pages: 139-155

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    Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:2:p:139-155
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