TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico

Santiago Garcia-Verdu, Manuel Ramos-Francia and Manuel Sánchez-Martínez
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Manuel Ramos-Francia: Banco de México, 5 de Mayo Ave. 2, Cuauhtemoc, Mexico City 06000, Mexico
Manuel Sánchez-Martínez: Banco de México, 5 de Mayo Ave. 2, Cuauhtemoc, Mexico City 06000, Mexico
Authors registered in the RePEc Author Service: Manuel Ramos Francia

Quarterly Journal of Finance (QJF), 2019, vol. 09, issue 02, 1-23

Abstract: Information extracted from financial derivatives on interest rates is commonly used to forecast movements in interest rates. However, such an extraction generally assumes that agents are risk-neutral, which is not necessarily the case. Accordingly, it might be useful to account for the agents’ risk-aversion when doing these forecasts, which one can implement by adding a risk-correction. In this context, we use TIIE-28 swaps to forecast changes in monetary policy in Mexico, using a set of financial variables to account for the risk-correction. We assess whether models with a risk-correction outperform the TIIE-28 swaps rates, and find that the in-sample explained variability improves when using a risk-correction. Centrally, we document that our main model’s out-of-sample forecasts are similar for short horizons (3-month), and statistically significantly better for longer horizons (9 to 24-month), compared to the direct use of TIIE-28 swaps interest rates.

Keywords: TIIE-28; swaps; interest rates; monetary policy; expected monetary policy; risk-adjustment (search for similar items in EconPapers)
Date: 2019
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Working Paper: TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico (2018)
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DOI: 10.1142/S2010139219500046

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