Modelling and forecasting international interest rate spreads: UK, Germany, Japan and the USA
by Orla Gough; K. Ben Nowman; Stefan Van Dellen
International Journal of Financial Engineering and Risk Management (IJFERM), Vol. 1, No. 4, 2014

Abstract: The interest rate spread is of importance to policymakers 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.

Online publication date: Thu, 30-Apr-2015

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