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TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico

Author

Listed:
  • Santiago García-Verdú

    (Banco de México, 5 de Mayo Ave. 2, Cuauhtemoc, Mexico City 06000, Mexico)

  • Manuel Ramos-Francia

    (Banco de México, 5 de Mayo Ave. 2, Cuauhtemoc, Mexico City 06000, Mexico)

  • Manuel Sánchez-Martínez

    (Banco de México, 5 de Mayo Ave. 2, Cuauhtemoc, Mexico City 06000, Mexico)

Abstract

Information extracted from financial derivatives on interest rates is commonly used to forecast movements in interest rates. However, such an extraction generally assumes that agents are risk-neutral, which is not necessarily the case. Accordingly, it might be useful to account for the agents’ risk-aversion when doing these forecasts, which one can implement by adding a risk-correction. In this context, we use TIIE-28 swaps to forecast changes in monetary policy in Mexico, using a set of financial variables to account for the risk-correction. We assess whether models with a risk-correction outperform the TIIE-28 swaps rates, and find that the in-sample explained variability improves when using a risk-correction. Centrally, we document that our main model’s out-of-sample forecasts are similar for short horizons (3-month), and statistically significantly better for longer horizons (9 to 24-month), compared to the direct use of TIIE-28 swaps interest rates.

Suggested Citation

  • Santiago García-Verdú & Manuel Ramos-Francia & Manuel Sánchez-Martínez, 2019. "TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-23, June.
    • Handle: RePEc:wsi:qjfxxx:v:09:y:2019:i:02:n:s2010139219500046
    DOI: 10.1142/S2010139219500046
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    More about this item

    Keywords

    TIIE-28; swaps; interest rates; monetary policy; expected monetary policy; risk-adjustment;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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