Can forward rates be used to improve interest rate forecasts?"

Alfonso Novales and Emilio Domínguez Irastorza ()

Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: We evaluate the extent to which the explanatory power detected in the term structure in different markets and countries can actually be used to produce sensible forecasts of future short-term interest rates. Specifically, in spite of the forecasting connotation of the unbiasedness property of forward rates, actual evaluation of their forecasting performance has received scant attention in the literature on the term structure. We use monthly data for 1978-1998 on interest rates on Eurodeposits on the US dollar, yen, Deutsche mark, British pound, Spanish peseta, French franc, Italian lira and Swiss franc, comparing forecasts obtained from forward rates to those obtained from univariate autoregressions. By themselves, forward rates produce better one-step ahead forecasts, as well as better once-and-for all forecasts of 1-month interest rates over a full year horizon than those obtained from the own past of interest rates. The gain in one-step ahead forecasting disappears for longer maturities, although forward rates still produce better once-and-for all predictions of 3- and 6-month interest rates than univariate autoregressions for a number of currencies.

Keywords: Expectations hypothesis; Term structure; Forward rates (search for similar items in EconPapers)
JEL-codes: E37 E43 (search for similar items in EconPapers)
Pages: pages
Date: 2002
New Economics Papers: this item is included in nep-rmg
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Journal Article: Can forward rates be used to improve interest rate forecasts? (2002)
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