Forecasting interest rates with shifting endpoints

Authors

  • Dick van Dijk,

    Corresponding author
    1. Econometric Institute, Erasmus University Rotterdam, The Netherlands
    2. Tinbergen Institute, Amsterdam and Rotterdam, The Netherlands
    • Correspondence to: Dick van Dijk, Econometric Institute, Erasmus University Rotterdam, Burg. Oudlaan 50, NL-3062 PA Rotterdam, The Netherlands.

      E-mail: djvandijk@ese.eur.nl

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  • Siem Jan Koopman,

    1. Tinbergen Institute, Amsterdam and Rotterdam, The Netherlands
    2. Department of Econometrics, VU University, Amsterdam, The Netherlands
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  • Michel van der Wel,

    1. Econometric Institute, Erasmus University Rotterdam, The Netherlands
    2. Tinbergen Institute, Amsterdam and Rotterdam, The Netherlands
    3. CREATES, Aarhus, Denmark
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  • Jonathan H. Wright

    1. Department of Economics, Johns Hopkins University, Baltimore, MD, USA
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SUMMARY

We consider forecasting the term structure of interest rates with the assumption that factors driving the yield curve are stationary around a slowly time-varying mean or ‘shifting endpoint’. The shifting endpoints are captured using either (i) time series methods (exponential smoothing) or (ii) long-range survey forecasts of either interest rates or inflation and output growth, or (iii) exponentially smoothed realizations of these macro variables. Allowing for shifting endpoints in yield curve factors provides substantial and significant gains in out-of-sample predictive accuracy, relative to stationary and random walk benchmarks. Forecast improvements are largest for long-maturity interest rates and for long-horizon forecasts. Copyright © 2013 John Wiley & Sons, Ltd.

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