Federal Funds Rate Prediction

Lucio Sarno, Daniel Thornton and Giorgio Valente ()

No 183, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: Recent research has reported that both the federal funds rate futures market and the federal funds target contain valuable information for explaining the behavior of the US effective federal funds rate. A parallel literature on interest rate modelling has recorded evidence that the dynamics of interest rates displays significant regime-switching behavior. In this paper we produce out of sample forecasts of the federal funds rate at horizons up to 8 weeks ahead using linear and nonlinear, regime-switching equilibrium correction models of the funds rate and employing both point and density measures of forecast accuracy. We cannot discriminate among the models considered in terms of point forecast accuracy. However, in terms of density forecast accuracy, we find that the term structure model of the federal funds futures rate is significantly better than the other models considered, and that regime-switching models provide a substantial forecasting improvement relative to their linear counterparts and relative to individual series of the futures rate.

Keywords: federal funds rate; term structure of interest rates; forecasting; nonlinearity (search for similar items in EconPapers)
JEL-codes: E43 E47 (search for similar items in EconPapers)
Date: 2003-06-04
New Economics Papers: this item is included in nep-fin and nep-mon
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Related works:
Journal Article: Federal Funds Rate Prediction (2005)
Working Paper: Federal Funds Rate Prediction (2004)
Working Paper: Federal funds rate prediction (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ecj:ac2003:183

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