Forecasting Interest Rates with Shifting Endpoints

Journal of Applied Econometrics, 29, p693-712

Tinbergen Institute Discussion Paper 12-076/4

78 Pages Posted: 27 Jul 2012 Last revised: 5 Aug 2014

See all articles by Dick J. C. van Dijk

Dick J. C. van Dijk

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute; ERIM

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Michel van der Wel

Erasmus University Rotterdam; CREATES; ERIM; Tinbergen Institute

Jonathan H. Wright

Johns Hopkins University - Department of Economics

Date Written: March 11, 2013

Abstract

Existing studies on interest rate forecasting either treat yields as being stationary around a fixed mean or as a random walk process. In this study we consider forecasting the term structure of interest rates with the assumption that the yield curve is driven by factors that are stationary around a slowly time-varying mean or "shifting endpoint". The shifting endpoints are captured using either (i) time series methods (exponential smoothing), or (ii) long-range survey forecasts of either interest rates or inflation and output growth, or (iii) exponentially smoothed realizations of these macro variables. We find that allowing for shifting endpoints in yield curve factors can provide gains in the out-of-sample predictive accuracy, relative to stationary and random walk benchmarks. These gains are statistically significant, and can involve more than 20 percent reductions in root mean square prediction error.

Keywords: Non-stationarity, survey forecasts, term structure of interest rates, forecasting, yield curve

JEL Classification: C32, E43, G17

Suggested Citation

van Dijk, Dick J.C. and Koopman, Siem Jan and van der Wel, Michel and Wright, Jonathan H., Forecasting Interest Rates with Shifting Endpoints (March 11, 2013). Journal of Applied Econometrics, 29, p693-712, Tinbergen Institute Discussion Paper 12-076/4, Available at SSRN: https://ssrn.com/abstract=2114101 or http://dx.doi.org/10.2139/ssrn.2114101

Dick J.C. Van Dijk (Contact Author)

Erasmus University Rotterdam - Erasmus School of Economics - Econometric Institute

P.O. Box 1738
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Netherlands

ERIM ( email )

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HOME PAGE: http://people.few.eur.nl/djvandijk

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
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Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

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HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
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DK-8000 Aarhus C
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Michel Van der Wel

Erasmus University Rotterdam ( email )

Burg. Oudlaan 50
Rotterdam, NL 3062 PA
Netherlands

CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

ERIM ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Jonathan H. Wright

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States

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