Modelling and forecasting international interest rate spreads: UK, Germany, Japan and the US

Gough, O., Nowman, K.B. and Van Dellen, S. 2014. Modelling and forecasting international interest rate spreads: UK, Germany, Japan and the US. International Journal of Financial Engineering and Risk Management. 1 (4), pp. 309-333. https://doi.org/10.1504/IJFERM.2014.065648

TitleModelling and forecasting international interest rate spreads: UK, Germany, Japan and the US
TypeJournal article
AuthorsGough, O., Nowman, K.B. and Van Dellen, S.
Abstract

The interest rate spread is of importance to policy-makers and finance professionals in asset allocation and is a common measure of financial market stress. In this paper, we model and forecast the interest rate spreads for a number of countries using two well-known continuous time models and discrete time ARMA and ARFIMA models. We use monthly and weekly data which cover the recent global financial market crisis of 2007-2009 for Germany, Japan, UK and the USA. We find that the Merton's continuous-time model outperforms all other model specifications in terms of the mean of the forecast errors, MAPE and RMSE.

Keywordscontinuous time, Gaussian estimation, autoregressive models, interest rate spreads
JournalInternational Journal of Financial Engineering and Risk Management
Journal citation1 (4), pp. 309-333
ISSN2049-0909
Year2014
PublisherInderScience
Accepted author manuscript
Digital Object Identifier (DOI)https://doi.org/10.1504/IJFERM.2014.065648
Publication dates
Published28 Oct 2014

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