A comparison of multi-factor term structure models for interbank rates

Frank J. Fabozzi (), Francesco A. Fabozzi () and Diana Tunaru ()
Additional contact information
Frank J. Fabozzi: EDHEC Business School
Francesco A. Fabozzi: Yale School of Management
Diana Tunaru: University of Kent

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 1, No 10, 323-356

Abstract: Abstract In this paper, we present a robust predictive comparison of several continuous-time multi-factor models in the context of interbank rates. Recognizing the specific dynamics of the short-term segment of the yield curve, we examine the U.S. money market by extending two continuous-time frameworks with different factor structures, the Chan-Karolyi-Longstaff-Sanders (CKLS) model and the arbitrage-free dynamic Nelson-Siegel (AFDNS) model. A battery of formal forecasting accuracy tests is employed to select a subset of superior predictive models. Despite a better goodness-of-fit measure, additional factors improve the forecasting performance only for the CKLS family. With implications for monetary policy formulation, we found evidence of two separate maturity segments as the three-factor AFDNS and the five-factor CKLS models outperform parsimonious benchmarks in predicting the interbank rates for very short maturities. Our comparative forecasting results are re-confirmed with stronger out-of-sample performance for the five-factor CKLS model when the post global financial crisis sub-sample is analyzed.

Keywords: Interbank rates; Continuous-time models; Multi-factor term structure models; Forecasting tests (search for similar items in EconPapers)
JEL-codes: C13 C22 G15 G17 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11156-023-01147-2 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:rqfnac:v:61:y:2023:i:1:d:10.1007_s11156-023-01147-2

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-023-01147-2

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().