Title: Interest rate forecasting and the financial crisis: a turning point in more than just one way

Authors: Frederik Kunze; Mario Gruppe; Tilo Wendler

Addresses: Norddeutsche Landesbank Girozentrale, Department of Economics, Friedrichswall 10, 30159 Hannover, Germany ' Norddeutsche Landesbank Girozentrale, Department of Economics, Friedrichswall 10, 30159 Hannover, Germany ' Hochschule für Technik und Wirtschaft (HTW) Berlin, Fachbereich Wirtschaftswissenschaften I, Treskowallee 8, 10318 Berlin, Germany

Abstract: Investors frequently rely on forecasts published by professional analysts. During the financial crisis uncertainty has substantially risen. Not surprisingly experts' predictions should be more than welcome for decision makers. After modelling the long-term relationship between the three month EURIBOR and the Consensus Economic forecast by using co-integration analysis this paper tests for changes in the accuracy of forecasts for the three month EURIBOR. We use traditional evaluation methods like sign accuracy tests, turning point analysis and the root mean square error (RMSE). We find evidence for a crisis related structural break. Checking for quality changes it can be stated that the forecasters' accuracy after the first months of the crisis is not much better in general. Furthermore, neither before nor after the structural break the analysts' forecasts did outperform a random prediction. But it can at least be stated that there is a significant improvement in the turning point prediction.

Keywords: financial crisis; interest rate forecasts; co-integration; structural breaks; forecast evaluation; turning points; TOTA-coefficient; interest rates; forecasting accuracy; modelling.

DOI: 10.1504/IJFERM.2015.068850

International Journal of Financial Engineering and Risk Management, 2015 Vol.2 No.1, pp.1 - 16

Received: 01 Feb 2014
Accepted: 01 Aug 2014
Published online: 15 Apr 2015 *