Working Paper: CEPR ID: DP6188
Authors: Massimo Guidolin; Allan G. Timmermann
Abstract: This paper develops a flexible approach to combine forecasts of future spot rates with forecasts from time-series models or macroeconomic variables. We find empirical evidence that accounting for both regimes in interest rate dynamics and combining forecasts from different models helps improve the out-of-sample forecasting performance for US short-term rates. Imposing restrictions from the expectations hypothesis on the forecasting model are found to help at long forecasting horizons.
Keywords: forecast combinations; term structure of interest rates
JEL Codes: C53; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| combining forecasts from different models (C53) | improved out-of-sample forecasting performance for US short-term interest rates (E47) |
| accounting for nonlinear regime dynamics (C22) | enhanced forecast accuracy (C53) |
| imposing restrictions from the expectations hypothesis (C51) | improved out-of-sample performance at long horizons (C58) |
| regime dynamics (O17) | forecast accuracy (C53) |
| forecasting model interaction with underlying state of the economy (C53) | performance under varying economic conditions (P17) |