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

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  • García-Verdú Santiago
  • Ramos Francia Manuel
  • Sánchez-Martínez Manuel

Abstract

Information extracted from financial derivatives on interest rates is commonly used to forecast movements in such rates. Yet, such an extraction generally assumes that agents are risk-neutral. Thus, it might be useful to account for their risk-aversion when doing forecasts. This can be done adding a risk-correction. In this context, we use TIIE-28 swaps to forecast changes in monetary policy in Mexico, using financial variables to account for the risk-correction. We assess whether models with a risk-correction outperform the TIIE-28 swaps rates. Their in-sample explained variability improves when using a risk-correction. Our main model?s out-of-sample forecasts are similar for short horizons (3-month), and statistically better for longer horizons (9 to 24-month), compared to the direct use of TIIE-28 swaps interest rates.

Suggested Citation

  • García-Verdú Santiago & Ramos Francia Manuel & Sánchez-Martínez Manuel, 2018. "TIIE-28 Swaps as Risk-Adjusted Forecasts of Monetary Policy in Mexico," Working Papers 2018-16, Banco de México.
    • Handle: RePEc:bdm:wpaper:2018-16
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    More about this item

    Keywords

    TIIE-28; Swaps; Interest Rates; Monetary Policy;
    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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