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Title: Forecasts of US Short-term Interest Rates: A Flexible Forecast Combination Approach

Author(s): Massimo Guidolin and Allan Timmermann

Publication Date: March 2007

Keyword(s): forecast combinations and term structure of interest rates

Programme Area(s): Financial Economics

Abstract: This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.

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Bibliographic Reference

Guidolin, M and Timmermann, A. 2007. 'Forecasts of US Short-term Interest Rates: A Flexible Forecast Combination Approach'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=6188