TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico

Santiago Garcia-Verdu, Manuel Ramos Francia and Sánchez-Martínez Manuel

No 2018-16, Working Papers from Banco de México

Abstract: Information extracted from financial derivatives on interest rates is commonly used to forecast movements in such rates. Yet, such an extraction generally assumes that agents are risk-neutral. Thus, it might be useful to account for their risk-aversion when doing forecasts. This can be done adding a risk-correction. In this context, we use TIIE-28 swaps to forecast changes in monetary policy in Mexico, using financial variables to account for the risk-correction. We assess whether models with a risk-correction outperform the TIIE-28 swaps rates. Their in-sample explained variability improves when using a risk-correction. Our main model?s out-of-sample forecasts are similar for short horizons (3-month), and statistically better for longer horizons (9 to 24-month), compared to the direct use of TIIE-28 swaps interest rates.

Keywords: TIIE-28; Swaps; Interest Rates; Monetary Policy (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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