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Non-linear interest rate dynamics and forecasting: evidence for US and Australian interest rates

✍ Scribed by David G. McMillan

Publisher
John Wiley and Sons
Year
2009
Tongue
English
Weight
224 KB
Volume
14
Category
Article
ISSN
1076-9307

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✦ Synopsis

Abstract

Recent empirical finance research has suggested the potential for interest rate series to exhibit non‐linear adjustment to equilibrium. This paper examines a variety of models designed to capture these effects and compares both their in‐sample and out‐of‐sample performance with a linear alternative. Using short‐ and long‐term interest rates we report evidence that a logistic smooth‐transition error‐correction model is able to best characterize the data and provide superior out‐of‐sample forecasts, especially for the short rate, over both linear and non‐linear alternatives. This model suggests that market dynamics differ depending on whether the deviations from long‐run equilibrium are above or below the threshold value. Copyright © 2007 John Wiley & Sons, Ltd.

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