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Forecasts of US Short-term Interest Rates: A Flexible Forecast Combination Approach

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  • Guidolin, Massimo
  • Timmermann, Allan G

Abstract

This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6188.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6188
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Keywords: forecast combinations; term structure of interest rates;

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Find related papers by JEL classification:
  • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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