Forecasting the term structure of interest rates in Mexico using an affine model

  • Rocío Elizondo Banco de México
Keywords: affine model, forecasts, yield curve, principal components, non-arbitrage condition
JEL Classification: G12, E43, C12, C53

Abstract

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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Published
01-07-2017
How to Cite
ElizondoR. (2017). Forecasting the term structure of interest rates in Mexico using an affine model. Estudios Económicos, 32(2), 213-253. https://doi.org/10.24201/ee.v32i2.7
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