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Dynamic correlations and forecasting of term structure slopes in eurocurrency market

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Abstract

Using monthly data on Euro-rates for 1979-1998, we examine the extent to which crosscountry information on term structure slopes can be used to improve upon univariate slope forecasts. This is interesting from the point of view of forecasting economic activity, since term structure slopes are known to anticipate fluctuations in the real economy. Additionally, the Expectations Hypothesis states that the term structure slope summarizes the available information which is relevant for forecasting future short-term interest rates, so that improved slope forecasts might also lead to better forecasts of future interest rates. We find ample evidence of significant explanatory power in term structure slopes across countries. Besides, we document that this information content leads to improved forecasts of the term structure slope in some countries, using a foreign slope as indicator.

Suggested Citation

  • Alfonso Novales & Emilio Domínguez, 2002. "Dynamic correlations and forecasting of term structure slopes in eurocurrency market," Documentos de Trabajo del ICAE 0226, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  • Handle: RePEc:ucm:doicae:0226
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    File URL: http://eprints.ucm.es/7688/1/0226.pdf
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    1. Karfakis, Costas J & Moschos, Demetrios M, 1990. "Interest Rate Linkages within the European Monetary System: A Time Series Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(3), pages 389-394, August.
    2. Katsimbris, George M & Miller, Stephen M, 1993. "Interest Rate Linkages within the European Monetary System: Further Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(4), pages 771-779, November.
    3. Estrella, Arturo & Hardouvelis, Gikas A, 1991. " The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    4. Hagen, Jurgen von & Fratianni, Michele, 1990. "German dominance in the EMS: evidence from interest rates," Journal of International Money and Finance, Elsevier, vol. 9(4), pages 358-375, December.
    5. repec:syd:wpaper:144 is not listed on IDEAS
    6. Plosser, Charles I. & Geert Rouwenhorst, K., 1994. "International term structures and real economic growth," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 133-155, February.
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    Cited by:

    1. Abad, Pilar & Novales, Alfonso, 2005. "An error correction factor model of term structure slopes in international swap markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(3), pages 229-254, July.

    More about this item

    Keywords

    Term structure of interest rates; Term structure slope; Expectations hypothesis; Eurocurrencies.;

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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