Forecasting Interest Rates and Yield Spreads: The Informational Content of Implied Futures Yields and Best-fitting Forward Rate Models
✍ Scribed by TAE H. PARK; LORNE N. SWITZER
- Publisher
- John Wiley and Sons
- Year
- 1997
- Tongue
- English
- Weight
- 243 KB
- Volume
- 16
- Category
- Article
- ISSN
- 0277-6693
No coin nor oath required. For personal study only.
✦ Synopsis
Forecasts of interest rates for dierent maturities are essential for forecasts of asset prices. The growth of derivatives markets coupled with the development of complex theories of the term structure of interest rates have provided forecasters with a rich array of variables for predicting interest rates and yield spreads. This paper extends previous work on forecasting future interest rates and yield spreads using market data for T-bills, T-Notes, and Treasury Bond spot and futures contracts. The information conveyed in technical models that use market data is also assessed, using a recent innovation in interest rate modelling, the maximum smoothness approach. Forecasts from this model are compared with predicted yields and yield spreads derived from futures prices as well as with those of the random walk model. The results show some evidence of market segmentation, with more arbitrage evident for nearby maturities. Market participants appear to show a greater degree of consensus on short-term interest rates than on longer-term interest rates. There is some indication that forecasts from the futures markets are marginally better than those provided by those of the maximum-smoothness approach, consistent with the informational advantages of futures markets. Finally, futures and maximum-smoothness market forecasts are shown to outperform those of the random walk model.