Forecasting Spot Interest Rate Volatility
54 Pages Posted: 27 Mar 2000
Date Written: December 1999
This paper compares the in-sample and out-of-sample forecasting performance of models of the spot interest rate volatility using French and Germany short-term interest rates, 1981-1997. For a one-week horizon, the volatility forecasts evaluation shows that the model with the best fit does not have the highest forecasting power. The out-of-sample evidence supports that models with only news effect have similar forecasting power and effciency to models with mixed level and news effect, which have the best fit. Also, sample variance forecasts calculated using exponentially declining weights present forecasting power and effciency similar to the best volatility models.
Keywords: Interest rates, Stochastic volatility, GARCH, Forecasting.
JEL Classification: C52, C53, G12, E43
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