Forecasting interest rates using shifting endpoints in small open economies: evidence from Canada and the UK

Date
2022-06
Editor(s)
Advisor
Kısacıkoğlu, Burçin
Supervisor
Co-Advisor
Co-Supervisor
Instructor
Source Title
Print ISSN
Electronic ISSN
Publisher
Bilkent University
Volume
Issue
Pages
Language
English
Journal Title
Journal ISSN
Volume Title
Series
Abstract

This thesis examines the forecasting performance of widely used interest rate forecasting methods for small open economies such as Canada and the UK. In particular, I run a horse race between standard models and the models using shifting endpoints to see whether results for the US extends to small open economies. In this setup, three time-varying parameters, interpreted as factors corresponding to level, slope and curvature, are allowed to have shifting long-run means rather than a constant mean. The shifting endpoints are introduced by exponential smoothing of factors, and the connection of factors with certain macroeconomic variables and inflation expectations. In comparison to the random walk benchmark, allowing for shifting endpoints in yield curve factors offers significant gains in out-of-sample forecasting accuracy. Moreover, results suggest that there is a strong evidence that the US as a global economy has a spillover effect on the term structure of interest rates of Canada and the UK.

Course
Other identifiers
Book Title
Citation
Published Version (Please cite this version)