Forecasting interest rate swap spreads using domestic and international risk factors: Evidence from linear and non-linear models
This paper explores the ability of factor models to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neighbours model as well as that of linear AR and VAR models.We find some evidence that the non-linear models predict better than the linear ones. At short horizons, the nearest-neighbours (NN) model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions. At long horizons, the STVAR model increases its forecasting ability over the linear models, whereas the NN model does not outperform the rest of the models.
Year of publication: |
2006-04
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Authors: | Milas, Costas ; Panagiotidis, Theodore ; Lekkos, Ilias |
Institutions: | Centre for Economic Research, School of Economics and Management Studies |
Subject: | Interest rate swap spreads | term structure of interest rates | factor models | regime switching | smooth transition models | nearest-neighbours | forecasting |
Saved in:
freely available
Extent: | application/pdf |
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Series: | Keele Economics Research Papers. - ISSN 1740-231X. |
Type of publication: | Book / Working Paper |
Notes: | Forthcoming in Journal of Forecasting The text is part of a series Keele Economics Research Papers Number KERP 2006/05 24 pages |
Classification: | C51 - Model Construction and Estimation ; C52 - Model Evaluation and Testing ; C53 - Forecasting and Other Model Applications ; E43 - Determination of Interest Rates; Term Structure Interest Rates |
Source: |
Persistent link: https://www.econbiz.de/10005416707