TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico
Santiago Garcia-Verdu (),
Manuel Ramos-Francia and
No 2018-16, Working Papers from Banco de México
Information extracted from financial derivatives on interest rates is commonly used to forecast movements in such rates. Yet, such an extraction generally assumes that agents are risk-neutral. Thus, it might be useful to account for their risk-aversion when doing forecasts. This can be done adding a risk-correction. In this context, we use TIIE-28 swaps to forecast changes in monetary policy in Mexico, using financial variables to account for the risk-correction. We assess whether models with a risk-correction outperform the TIIE-28 swaps rates. Their in-sample explained variability improves when using a risk-correction. Our main model’s out-of-sample forecasts are similar for short horizons (3-month), and statistically 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; Expected Monetary Policy (search for similar items in EconPapers)
JEL-codes: E52 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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Journal Article: TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bdm:wpaper:2018-16
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