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Interest Rates Modeling and Forecasting: Do Macroeconomic Factors Matter?

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  • Adam Kucera

    () (Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Smetanovo nabrezi 6, 111 01 Prague 1, Czech Republic
    Czech National Bank)

Abstract

Recent studies documented a sufficient forecasting performance of shadow-rate models in the low yields environment. Moreover, it has been shown that including the macro-variables into the shadow-rate models further improves the results. We build on these findings and evaluate for the U.S. Treasury yields, whether the lower bound proximity was truly the only issue to reflect in the interest rate modeling since the Great Recession. Surprisingly, we discover that the relative importance of yield curve factors has changed as well. More specifically, instead of macroeconomic factors, financial market sentiment factors became dominant since the recent financial turmoil. Based on such finding, we show, that extending the macro-finance interest rate models by financial market sentiment proxies further improves the forecasting performance.

Suggested Citation

  • Adam Kucera, 2017. "Interest Rates Modeling and Forecasting: Do Macroeconomic Factors Matter?," Working Papers IES 2017/08, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Mar 2017.
  • Handle: RePEc:fau:wpaper:wp2017_08
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    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/5640/lang/cs
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    More about this item

    Keywords

    Interest Rate; Yield Curve; Macro-Finance Model; Affine Model; Nelson-Siegel;
    All these keywords.

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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