Forecasting Short Term Interest Rates Using Arma, Arma-Garch and Arma-Egarch Models

14 Pages Posted: 24 Jan 2006

See all articles by S. Radha

S. Radha

Indira Gandhi National Open University (IGNOU); Indian Institute of Technology Madras

M. Thenmozhi

Indian Institute of Technology Madras

Abstract

Forecasting interest rates is of great concern for financial researchers, economists and players in the fixed income markets. The purpose of this study is to develop an appropriate model for forecasting the short-term interest rates i.e., commercial paper rate, implicit yield on 91 day treasury bill, overnight MIBOR rate and call money rate. The short-term interest rates are forecasted using univariate models, Random Walk, ARIMA, ARMA-GARCH and ARMA-EGARCH and the appropriate model for forecasting is determined considering six-year period from 1999. The results show that interest rates time series have volatility clustering effect and hence GARCH based models are more appropriate to forecast than the other models. It is found that for commercial paper rate ARIMA-EGARCH model is most appropriate model, while for implicit yield 91 day Treasury bill, overnight MIBOR rate and call money rate, ARIMA-GARCH model is the most appropriate model for forecasting.

Keywords: Interest rates, forecasting, ARIMA, GARCH

Suggested Citation

Radha, S. and Thenmozhi, M., Forecasting Short Term Interest Rates Using Arma, Arma-Garch and Arma-Egarch Models. Indian Institute of Capital Markets 9th Capital Markets Conference Paper. Available at SSRN: https://ssrn.com/abstract=876556 or http://dx.doi.org/10.2139/ssrn.876556

S. Radha (Contact Author)

Indira Gandhi National Open University (IGNOU)

Faculty of economics
school of social sciences
new delhi, 110068
India

Indian Institute of Technology Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu
India

M. Thenmozhi

Indian Institute of Technology Madras ( email )

Sardar Patel Road
Guindy
Chennai, TN Tamil Nadu
India

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