Forecasting the 10‐year US Treasury rate |
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Authors: | Hamid Baghestani |
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Affiliation: | Department of Economics, School of Business and Management, American University of Sharjah, UAE |
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Abstract: | This study compares the performance of two forecasting models of the 10‐year Treasury rate: a random walk (RW) model and an augmented‐autoregressive (A‐A) model which utilizes the information in the expected inflation rate. For 1993–2008, the RW and A‐A forecasts (with different lead times and forecast horizons) are generally unbiased and accurately predict directional change under symmetric loss. However, the A‐A forecasts outperform the RW, suggesting that the expected inflation rate (as a leading indicator) helps improve forecast accuracy. This finding is important since bond market efficiency implies that the RW forecasts are optimal and cannot be improved. Copyright © 2009 John Wiley & Sons, Ltd. |
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Keywords: | random walk augmented‐autoregressive Fisher equation directional accuracy symmetric loss |
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