Martingales and efficient forecasts of effective mortgage rates

✍ Scribed by William Reichenstein

• Book ID: 104652507
• Publisher: Springer US
• Year: 1989
• Tongue: English
• Weight: 767 KB
• Volume: 2
• Category: Article
• ISSN: 0895-5638
• DOI: 10.1007/bf00177951

✦ Synopsis

Economic theory and empirical evidence indicate that the optimal near-term forecast of a long-term rate is (approximately) today's rate; the no-change model should provide excellent near-term forecasts of a long-term rate. This article estimates the longest tbrecast horizon over which no-change predictions of each of three mortgage-related interest rates pass a series of quality tests. The empirical results reject the optimality of no-change predictions of the one-year Treasury bill rate for all forecast horizons. Since October 1979, the tests support the hypothesis that no-change predictions of the 30-year conventional home mortgage and GNMA rates are optimal for forecast horizons of up to threequarters-ahead.