DP6188 Forecasts of US Short-term Interest Rates: A Flexible Forecast Combination Approach
|Author(s):||Massimo Guidolin, Allan Timmermann|
|Publication Date:||March 2007|
|Keyword(s):||forecast combinations, term structure of interest rates|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=6188|
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.