Dynamic correlations and forecasting of term structure slopes in eurocurrency market

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: Using monthly data on Euro-rates for 1979-1998, we examine the extent to which crosscountry information on term structure slopes can be used to improve upon univariate slope forecasts. This is interesting from the point of view of forecasting economic activity, since term structure slopes are known to anticipate fluctuations in the real economy. Additionally, the Expectations Hypothesis states that the term structure slope summarizes the available information which is relevant for forecasting future short-term interest rates, so that improved slope forecasts might also lead to better forecasts of future interest rates. We find ample evidence of significant explanatory power in term structure slopes across countries. Besides, we document that this information content leads to improved forecasts of the term structure slope in some countries, using a foreign slope as indicator.

Keywords: Term structure of interest rates; Term structure slope; Expectations hypothesis; Eurocurrencies. (search for similar items in EconPapers)
JEL-codes: E37 E43 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2002
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