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

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Listed:
  • Oliver Blaskowitz
  • Helmut Herwartz
  • Gonzalo de Cadenas Santiago

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.

Suggested Citation

  • Oliver Blaskowitz & Helmut Herwartz & Gonzalo de Cadenas Santiago, 2005. "Modeling the FIBOR/EURIBOR Swap Term Structure: An Empirical Approach," SFB 649 Discussion Papers SFB649DP2005-024, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  • Handle: RePEc:hum:wpaper:sfb649dp2005-024
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    References listed on IDEAS

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    Cited by:

    1. Oliver Blaskowitz & Helmut Herwartz, 2009. "Adaptive forecasting of the EURIBOR swap term structure," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 28(7), pages 575-594.

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    More about this item

    Keywords

    Principal components; Factor Analysis; Ex–ante forecasting; EURIBOR swap rates; Term structure; Trading strategies;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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