Forecasting Canadian Short-Term Interest Rates Thomas Thorn

Motivation Forecasting S/T interest rates is important for central banks, individual & private investors Existing papers apply different methodologies on different sets of data: makes it difficult to compare

Data CANSIM: 3/6 month T-bills; 1-3 year, 3-5 year, 5-10 year and 10+ year average bond yields Given monthly observations, convert to quarterly by using March, June, September and December observations

Data To back out spot yield curve: where c = coupon rate, p t =premium paid Problem: Gvt of Canada coupon rates are not available on CANSIM or from Bank of Canada

If I remember correctly these are just bond yield averages available from the Bank of Canada (they should be on CANSIM). Because these are averages I assumed that at each point in time the "bond" in question was a par bond (so YTM = coupon).

What? I’m not sure that’s right..

Data If bonds are sold at par, p t = 0, so: However, this will be a complex number when ‘n’ is even Couldn’t figure out what was going on: skipped using forward rates

Results – Table 1 Table 1: ADFs galore: T-bill rate

Results – Table 1 Table 1: ADFs galore: Long rate

Results – Table 1 Table 1: Cointegration

Results – Table 1 Table 1: Cointegration

Results – Table 1 Table 1: Cointegration

Results – Table 2

Results – Table 3

Results – Table 4 1.the sample size is initialized to range from 1951Q1 to 1962Q4. 2.a regression is estimated 3.a forecast is made for 1 quarter ahead 4.the forecasts error is determined and saved 5.the sample size is increased by a single quarter, and the program returns to step (2) until 1992Q3 6.RMSE and MAE are calculated

Results – Table 4

Failures I couldn’t replicate any of the BG p-values Systematic difference between our results I couldn’t back out spot yield curve