Forecasting Short Term Interest Rates Using Arma, Arma-Garch and Arma-Egarch Models
14 Pages Posted: 24 Jan 2006
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: Suggested Citation