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The Information in the term structure of interest rates: out-of-sample forecasting performance

Author: Park, Jae Won INSEAD Area: Economics and Political Science Series: Working Paper ; 90/48/EPS Publisher: Fontainebleau : INSEAD, 1990.Language: EnglishDescription: 34 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: This paper examines the predictive power of forward rates implicit in the term structure of the US Treasury bill interest rates. It compares the out-of-sample forecasting accuracy and the information content of ex-ante forecasts based on forward rates with several alternative forecasts for future interest rates. The out-of-sample forecast based on forward rates is extracted through a recursive estimation of the regression equation of interest rate changes on forward spreads, the coefficients of which are allowed to change over time in order to allow for the changes in their relationship due to the existence of the time-varying risk premium
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This paper examines the predictive power of forward rates implicit in the term structure of the US Treasury bill interest rates. It compares the out-of-sample forecasting accuracy and the information content of ex-ante forecasts based on forward rates with several alternative forecasts for future interest rates. The out-of-sample forecast based on forward rates is extracted through a recursive estimation of the regression equation of interest rate changes on forward spreads, the coefficients of which are allowed to change over time in order to allow for the changes in their relationship due to the existence of the time-varying risk premium

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