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Cointegration rank switching model: an application to forecasting interest rates

Listed author(s):
  • Kosei Fukuda

This paper proposes a new forecasting method in which the cointegration rank switches at unknown times. In this method, time series observations are divided into several segments, and a cointegrated vector autoregressive model is fitted to each segment. The goodness of fit of the global model, consisting of local models with different cointegration ranks, is evaluated using the information criterion (IC). The division that minimizes the IC defines the best model. The results of an empirical application to the US term structure of interest rates and a Monte Carlo simulation suggest the efficacy as well as the limitations of the proposed method. Copyright (C) 2010 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/for.1191
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Forecasting.

Volume (Year): 30 (2011)
Issue (Month): 5 (August)
Pages: 509-522

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Handle: RePEc:jof:jforec:v:30:y:2011:i:5:p:509-522
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966

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  1. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  2. Jushan Bai & Pierre Perron, 1998. "Estimating and Testing Linear Models with Multiple Structural Changes," Econometrica, Econometric Society, vol. 66(1), pages 47-78, January.
  3. Tillmann, Peter, 2007. "Inflation regimes in the US term structure of interest rates," Economic Modelling, Elsevier, vol. 24(2), pages 203-223, March.
  4. Søren Johansen & Rocco Mosconi & Bent Nielsen, 2000. "Cointegration analysis in the presence of structural breaks in the deterministic trend," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 216-249.
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