Date post: | 13-Dec-2015 |
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Forecasting CanadianShort-Term Interest Rates
Thomas Thorn
Motivation
• Forecasting S/T interest rates is important for central banks, individual & private investors
• Existing papers apply different methodologies on different sets of data: makes it difficult to compare
Data
• CANSIM: 3/6 month T-bills; 1-3 year, 3-5 year, 5-10 year and 10+ year average bond yields
• Given monthly observations, convert to quarterly by using March, June, September and December observations
Data
• To back out spot yield curve:
where c = coupon rate, pt=premium paid
• Problem: Gvt of Canada coupon rates are not available on CANSIM or from Bank of Canada
If I remember correctly these are just bond yield averages available from the Bank of Canada (they should be on CANSIM). Because these are averages I assumed that at each point in time the "bond" in question was a par bond (so YTM = coupon).
What? I’m not sure that’s right..
Data
• If bonds are sold at par, pt = 0, so:
• However, this will be a complex number when ‘n’ is even
• Couldn’t figure out what was going on: skipped using forward rates
Results – Table 1
• Table 1: ADFs galore: T-bill rate
Results – Table 1
• Table 1: ADFs galore: Long rate
Results – Table 1
• Table 1: Cointegration
Results – Table 1
• Table 1: Cointegration
Results – Table 1
• Table 1: Cointegration
Results – Table 2
Results – Table 2
Results – Table 2
Results – Table 3
Results – Table 3
Results – Table 41. the sample size is initialized to range from 1951Q1 to
1962Q4. 2. a regression is estimated3. a forecast is made for 1 quarter ahead4. the forecasts error is determined and saved5. the sample size is increased by a single quarter, and the
program returns to step (2) until 1992Q36. RMSE and MAE are calculated
Results – Table 4
Failures
• I couldn’t replicate any of the BG p-values
• Systematic difference between our results
• I couldn’t back out spot yield curve