Forecasting the Comovements of Spot Interest Rates

Posted: 27 Oct 2004

See all articles by Miguel A. Ferreira

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Abstract

Time-varying covariance models are compared in the French and German interest rate markets of the pre-euro period. A bivariate, asymmetric dynamic covariance model with level effect best characterizes the in-sample variance-covariance dynamics. Model comparison using economic loss functions raises some doubts with alternative models performing similarly. Out-of-sample results show that the variance-covariance matrix is best forecasted using a VECH model with level effect but no volatility spillover, not entirely confirming the in-sample evidence. Simple models using exponentially-weighted moving averages of past observations perform similarly to the best bivariate model. Thus, some features required to obtain a good in-sample fit do not have additional out-of-sample forecasting power due to overfitting.

Keywords: Interest rates, Covariance models, GARCH, Forecasting

JEL Classification: C52, C53, G12, E43

Suggested Citation

Ferreira, Miguel Almeida, Forecasting the Comovements of Spot Interest Rates. Journal of International Money and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=609781

Miguel Almeida Ferreira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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