Forecasting interest rates: a comparative assessment of some second-generation nonlinear models

Dilip Nachane and Jose Clavel

Journal of Applied Statistics, 2008, vol. 35, issue 5, 493-514

Abstract: Modeling and forecasting of interest rates has traditionally proceeded in the framework of linear stationary methods such as ARMA and VAR, but only with moderate success. We examine here three methods, which account for several specific features of the real world asset prices such as nonstationarity and nonlinearity. Our three candidate methods are based, respectively, on a combined wavelet artificial neural network (WANN) analysis, a mixed spectrum (MS) analysis and nonlinear ARMA models with Fourier coefficients (FNLARMA). These models are applied to weekly data on interest rates in India and their forecasting performance is evaluated vis-a-vis three GARCH models [GARCH (1,1), GARCH-M (1,1) and EGARCH (1,1)] as well as the random walk model. Both the WANN and MS methods show marked improvement over other benchmark models, and may thus hold out several potentials for real world modeling and forecasting of financial data.

Keywords: interest rates; wavelets; artificial neural networks; mixed spectra; nonlinear ARMA; GARCH; forecast comparisons (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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Related works:
Working Paper: FORECASTING INTEREST RATES - A COMPARATIVE ASSESSMENT OF SOME SECOND GENERATION NON-LINEAR MODELS (2005)
Working Paper: Forecasting interest rates: A Comparative assessment of some second generation non-linear model (2005)
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DOI: 10.1080/02664760701835243

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