Fractional Differencing Modeling and Forecasting of Eurocurrency Deposit Rates

Using the spectral regression method, we test for long-term stochastic memory in three- and six-month daily returns series of Eurocurrency deposits denominated in major currencies. Significant evidence of positive long-term dependence is found in several Eurocurrency returns series. Compared with benchmark linear models, the estimate fractional models result in dramatic out-of-sample forecasting improvements over longer horizons for the Eurocurrency deposits denominated in German marks, Swiss francs, and Japanese yen.