A random walk approach to predicting US 30-year home mortgage rates

Hamid Baghestani

Journal of Housing Economics, 2008, vol. 17, issue 3, 225-233

Abstract: Following the implications of term structure theory in an efficient bond market, this study formulates a random walk model that produces unbiased and efficient forecasts of the 30-year mortgage rate for 1987-2006. Forecast accuracy improves with a reduction in lead time but deteriorates with an increase in the forecast horizon. We find, however, no clear trend indicating that forecast accuracy has improved over time. From a more practical perspective, the random walk forecasts of the 30-year mortgage rate and prepayment premium (the spread between 30-year mortgage and 10-year Treasury rates) accurately predict directional change and thus are of value to a user. In exploring the view that the 30-year mortgage rate often moves in tandem with the 10-year Treasury rate, we further find that these rates are cointegrated and thus converge to an equilibrium relation in the long-run.

Keywords: Long-term; interest; rates; Rationality; Directional; accuracy; Bond; market; efficiency; Prepayment; premium (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jhouse:v:17:y:2008:i:3:p:225-233

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