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Modeling and forecasting short-term interest rates : The benefits of smooth regimes, macroeconomic variables, and bagging

Francesco Audrino & Marcelo C. Medeiros

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abstract In this paper we propose a smooth transition tree model for both the
conditional mean and variance of the short-term interest rate process. The estimation of such models is addressed and the asymptotic properties of the quasi-maximum likelihood estimator are derived. Model specification is also discussed. When the model is applied to the US short-term interest rate we find (1) leading indicators for inflation and real activity are the most relevant predictors in characterizing the multiple regimes' structure; (2) the optimal model has three limiting regimes. Moreover, we provide empirical evidence of the power of the model in forecasting the first two conditional moments when it is used in connection with bootstrap aggregation (bagging).
   
type journal paper
   
keywords short-term interest rate, regression tree, smooth
transition, conditional variance, bagging, asymptotic theory.
   
language English
kind of paper journal article
date of appearance 9-2011
journal Journal of Applied Econometrics
publisher Wiley (Chichester UK)
ISSN 0883-7252
ISSN (online) 1099-1255
DOI 10.1002/jae.1171
volume of journal 26
number of issue 6
page(s) 999-1022
review double-blind review
   
citation Audrino, F., & Medeiros, M. C. (2011). Modeling and forecasting short-term interest rates: The benefits of smooth regimes, macroeconomic variables, and bagging. Journal of Applied Econometrics, 26(6), 999-1022, DOI:10.1002/jae.1171.