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Article

Non-linear interest rate dynamics and forecasting: evidence for US and Australian interest rates

Citation
McMillan D (2009) Non-linear interest rate dynamics and forecasting: evidence for US and Australian interest rates. International Journal of Finance and Economics, 14 (2), pp. 139-155. https://doi.org/10.1002/ijfe.358

Abstract
Recent empirical finance research has suggested the potential for interest rate series to exhibit non-linear adjustment to equilibrium. This paper examines a variety of models designed to capture these effects and compares both their in-sample and out-of-sample performance with a linear alternative. Using short- and long-term interest rates we report evidence that a logistic smooth-transition error-correction model is able to best characterize the data and provide superior out-of-sample forecasts, especially for the short rate, over both linear and non-linear alternatives. This model suggests that market dynamics differ depending on whether the deviations from long-run equilibrium are above or below the threshold value.

Keywords
Non-linear error correction; threshold models; interest rates

Journal
International Journal of Finance and Economics: Volume 14, Issue 2

StatusPublished
Author(s)McMillan, David
Publication date30/04/2009
Publication date online03/03/2009
URLhttp://hdl.handle.net/1893/25015
PublisherWiley Periodicals
ISSN1076-9307
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