Forecasting Canadian Short-Term Interest Rates Thomas Thorn

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<ul><li>Slide 1</li></ul> <p>Forecasting Canadian Short-Term Interest Rates Thomas Thorn Slide 2 Motivation Forecasting S/T interest rates is important for central banks, individual &amp; private investors Existing papers apply different methodologies on different sets of data: makes it difficult to compare Slide 3 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 Slide 4 Data To back out spot yield curve: where c = coupon rate, p t =premium paid Problem: Gvt of Canada coupon rates are not available on CANSIM or from Bank of Canada Slide 5 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). Slide 6 What? Im not sure thats right.. Slide 7 Data If bonds are sold at par, p t = 0, so: However, this will be a complex number when n is even Couldnt figure out what was going on: skipped using forward rates Slide 8 Results Table 1 Table 1: ADFs galore: T-bill rate Slide 9 Results Table 1 Table 1: ADFs galore: Long rate Slide 10 Results Table 1 Table 1: Cointegration Slide 11 Results Table 1 Table 1: Cointegration Slide 12 Results Table 1 Table 1: Cointegration Slide 13 Results Table 2 Slide 14 Slide 15 Slide 16 Results Table 3 Slide 17 Slide 18 Results Table 4 1.the sample size is initialized to range from 1951Q1 to 1962Q4. 2.a regression is estimated 3.a forecast is made for 1 quarter ahead 4.the forecasts error is determined and saved 5.the sample size is increased by a single quarter, and the program returns to step (2) until 1992Q3 6.RMSE and MAE are calculated Slide 19 Results Table 4 Slide 20 Failures I couldnt replicate any of the BG p-values Systematic difference between our results I couldnt back out spot yield curve </p>