Forecasting the term structure of interest rates in Mexico using an affine model
DOI:
https://doi.org/10.24201/ee.v32i2.7Keywords:
affine model, forecasts, yield curve, principal components, non-arbitrage conditionAbstract
This paper shows that an affine model allows to equalize or improve the forecasts of the term structure of interest rates in Mexico. The forecasting model is a linear relationship between interest rates and three observable factors, using maturities 1-60 months. Affine model predictions are compared with those of forward rates, AR (1), VAR (1), and random walks. Affine model has a performance comparable to other models for horizons of 12- and 18-months, except for the random walk, which presents smaller forecast for maturities of 24- and 36- months. However, improving its forecasting performance for the 24- month horizon, and especially for 60-month maturities.
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