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Cointegration rank switching model: an application to forecasting interest rates

✍ Scribed by Kosei Fukuda

Publisher: John Wiley and Sons
Year: 2010
Tongue: English
Weight: 168 KB
Volume: 30
Category: Article
ISSN: 0277-6693
DOI: 10.1002/for.1191

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✦ Synopsis

This paper proposes a new forecasting method in which the cointegration rank switches at unknown times. In this method, time series observations are divided into several segments, and a cointegrated vector autoregressive model is fi tted to each segment. The goodness of fi t of the global model, consisting of local models with different cointegration ranks, is evaluated using the information criterion (IC). The division that minimizes the IC defi nes the best model. The results of an empirical application to the US term structure of interest rates and a Monte Carlo simulation suggest the effi cacy as well as the limitations of the proposed method.

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