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

Authors

  • Rocío Elizondo Banco de México

DOI:

https://doi.org/10.24201/ee.v32i2.7

Keywords:

affine model, forecasts, yield curve, principal components, non-arbitrage condition

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.

Downloads

Download data is not yet available.

References

Ang, A., G. Bekaert y M. Wei. 2007. The term structure of real rates and expected inflation, NBER, Working Paper Series, núm. 12930.

Ang, A. y M. Piazzesi. 2003. A no-arbitrage vector auto regression of term structure dynamics with macroeconomic and latent variables, Journal of Monetary Economics, 50: 745-787.

Christensen, J., F. Diebold y G. Rudebusch. 2007, The affine arbitrage-free class of Nelson-Siegel term structure models, Federal Reserve Bank of San Francisco, Working Paper Series, núm. 2007-20.

Clark, T. y M. McCracken. 2001. Test of equal forecast accuracy and encompassing for nested models, Journal of Econometrics, 105: 85-110.

Clark, T. y M. McCracken. 2010. Testing for unconditional predictive ability, Federal Reserve Bank of San Francisco, Working Paper Series, núm. 2010-031A.

Cortés, J., M. Ramos-Francia y A. Torres. 2008. Un análisis empírico de la estructura temporal de tasas de interés en México, Banco de México, documento de investigación, núm. 2008-07.

Cortés, J. y M. Ramos-Francia. 2008. Un modelo macroeconómico de la estructura temporal de tasas de interés en México, Banco de México, documento de investigación, núm. 2008-10.

Cox. J., J. Ingersoll y S. Ross. 1985. A theory of the term structure of interest rates, Econometrica, 53: 385-407.

Dai, Q. y K. Singleton. 2000. Specification analysis of affine term structure models, Journal of Finance, 55: 1943-1978.

De Pooter, M., F. Ravazzolo y D. van Dijk. 2010. Term structure forecasting using macro factors and forecast combination, Board of Governors of the Federal Reserve System, International Finance Discussion Papers, núm. 993.

Diebold, F. y C. Li. 2006. Forecasting the term structure of government bond yields, Journal of Econometrics, 130: 337-364.

Duffie, D. y R. Kan. 1996. A yield-factor model of interest rates, Mathematical Finance, 6: 379-406.

Favero, C., L. Niu y L. Sala. 2007. Term structure forecasting: No-arbitrage restrictions vs. large information Set, CEPR, International Macroeconomics Discussion Paper Series, núm. 6206.

Giacomini, R. y H. White. 2006. Test of conditional predictive ability, Econometrica, 74(6): 1545-1578.

Gimeno, R. y J. Marques. 2009. Extraction of financial market expectations about inflation and interest rates from market, Banco de España, documento de trabajo, núm. 0906.

Harvey, D, S. Leybourne y P. Newbold. 1997. Testing the equality of prediction mean squared errors, International Journal of Forecasting, 13: 281-291.

Jolliffe, I. 2002. Principal Component Analysis, Springer Series in Statistics, 2da. Edición.

Monch, E. 2005. Forecasting the yield curve in a data-rich environment: A noarbitrage factor-augmented VAR approach, European Central Bank, Working Paper Series, núm. 544.

Nelson, C. y A. Siegel. 1987. Parsimonious modeling of yield curve, Journal of Business, 60: 473-489.

Sethi, R. 2008. New Zealand zero-coupon yield curves: A principal-components analysis, Bank for International Settlements or the Reserve Bank of New Zealand (mimeo).

Svensson, L. 1994. Estimating and interpreting forward interest rates: Sweden 19921994, IMF, Working Paper, núm. 94/114.

Tipping, M. y C. Bishop. 1999. Probabilistic principal component analysis, Journal of the Royal Statistical Society Series B, 61(3): 611-622.

Valuación Operativa y Referencias de Mercado S. A. de C. V. (Valmer). Bases de datos, varios años, Grupo BMV, Ciudad de México, México.

Vasicek, O. 1977. An equilibrium characterization of the term structure, Journal of Finance Economics, 37: 177-188.

Yu, W. y E. Zivot. 2011. Forecasting the term structures of treasury and corporate yields using dynamic Nelson-Siegel models, International Journal of Forecasting, 27(2): 579-591.

Downloads

Published

2017-07-01

How to Cite

Elizondo, R. (2017). Forecasting the term structure of interest rates in Mexico using an affine model. Estudios Económicos De El Colegio De México, 32(2), 213–253. https://doi.org/10.24201/ee.v32i2.7
Metrics
Views/Downloads
  • Abstract
    1545
  • PDF (Español)
    618
  • XML (Español)
    8

Issue

64-vol. 32, no. 2, july-december, 2017

Section

Articles

Metrics