Forecasting Interest Rates with Shifting Endpoints

Dick van Dijk, Siem Jan Koopman, Michel van der Wel () and Jonathan Wright

No 12-076/4, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper led to a publication in the Journal of Applied Econometrics , 2014, 29, pages 693-712.

Many economic studies on inflation forecasting have found favorable results when inflation is modeled as a stationary process around a slowly time-varying trend. In contrast, the existing studies on interest rate forecasting either treat yields as being stationary, without any shifting endpoints, or treat yields as a random walk process. In this study we consider the problem of forecasting the term structure of interest rates with the assumption that the yield curve is driven by factors that are stationary around a time-varying trend. We compare alternative ways of modeling the time-varying trend. We find that allowing for shifting endpoints in yield curve factors can provide gains in the out-of-sample predictive accuracy, relative to stationary and random walk benchmarks. The results are both economically and statistically significant.

Keywords: term structure of interest rates; forecasting; non-stationarity; survey forecasts; yield curve (search for similar items in EconPapers)
JEL-codes: C32 E43 G17 (search for similar items in EconPapers)
Date: 2012-07-19
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Forecasting interest rates with shifting endpoints (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20120076

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