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Shrunken interest rate forecasts are better forecasts

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  • Reid Dorsey-Palmateer
  • Gary Smith

Abstract

Predicted changes in interest rates are imperfectly correlated with actual changes in interest rates. One statistical consequence may be that large predicted changes are more likely to be overestimates than underestimates of the magnitude of the change. If so, the accuracy of predicted interest rate changes can be improved by shrinking them toward a prior mean of zero. The application of this idea to interest rate forecasts by the Survey of Professional Forecasters found a consistent improvement in the accuracy of their predictions.

Suggested Citation

  • Reid Dorsey-Palmateer & Gary Smith, 2007. "Shrunken interest rate forecasts are better forecasts," Applied Financial Economics, Taylor & Francis Journals, vol. 17(6), pages 425-430.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:6:p:425-430
    DOI: 10.1080/09603100600749170
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    References listed on IDEAS

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