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
JEL(s): C53, G12
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.