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Please use this identifier to cite or link to this item: https://dspace.lboro.ac.uk/2134/1282

Title: Forecasting interest rate swap spreads using domestic and international risk
Authors: Lekkos, Ilias
Milas, Costas
Panagiotidis, Theodore
Keywords: Interest rate swap spreads
Term structure of interest rates
Factor models
Regime switching
Smooth transition models
Nearest-neighbours
Forecasting
Issue Date: 2006
Abstract: This paper explores the ability of factor models to predict the dynamics of US and UK interest rate swap spreads within a linear and a non-linear framework. We reject linearity for the US and UK swap spreads in favour of a regime-switching smooth transition vector autoregressive (STVAR) model, where the switching between regimes is controlled by the slope of the US term structure of interest rates. We compare the ability of the STVAR model to predict swap spreads with that of a non-linear nearest-neighbours model as well as that of linear AR and VAR models. We find some evidence that the non-linear models predict better than the linear ones. At short horizons, the nearest-neighbours (NN) model predicts better than the STVAR model US swap spreads in periods of increasing risk conditions and UK swap spreads in periods of decreasing risk conditions. At long horizons, the STVAR model increases its forecasting ability over the linear models, whereas the NN model does not outperform the rest of the models.
Description: This working paper is also available at: http://ideas.repec.org/p/lbo/lbowps/2006_6.html.
URI: https://dspace.lboro.ac.uk/2134/1282
Appears in Collections:Working Papers (Economics)

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