Modeling and Forecasting Short-term Interest Rates: The Benefits of Smooth Regimes, Macroeconomic Variables, and Bagging

Francesco Audrino and Marcelo Medeiros ()

No 570, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: In this paper we propose a smooth transition tree model for both the conditional mean and variance of the short-term interest rate process. The estimation of such models is addressed and the asymptotic properties of the quasi-maximum likelihood estimator are derived. Model specification is also discussed. When the model is applied to the US short-term interest rate we find (1) leading indicators for inflation and real activity are the most relevant predictors in characterizing the multiple regimes’ structure; (2) the optimal model has three limiting regimes. Moreover, we provide empirical evidence of the power of the model in forecasting the first two conditional moments when it is used in connection with bootstrap aggregation (bagging).

Keywords: short-term interest rate; regression tree; smooth transition; conditional variance; bagging; asymptotic theory (search for similar items in EconPapers)
Pages: 39p
Date: 2010-03
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-for, nep-mon and nep-ore
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:rio:texdis:570

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