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Federal Funds Rate Prediction

  • Giorgio Valente
  • Daniel Thornton
  • Lucio Sarno

We examine the forecasting performance of a range of time-series models of the daily U.S. effective federal funds (FF) rate recently proposed in the literature. We find that: (1) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate, (2) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target, and (3) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a natural interpretation and clear policy implications.

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File URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfri/rsrchcentres/ferc/wrkingpaprseries/fwp04-12.pdf
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Paper provided by Warwick Business School, Finance Group in its series Working Papers with number wp04-12.

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Date of creation: 2004
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Handle: RePEc:wbs:wpaper:wp04-12
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