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Forecasting Interest Rate Volatility of the United Kingdom: Evidence from over 150 Years of Data

Author

Listed:
  • Hossein Hassani

    (The Statistical Research Centre, Bournemouth University, Bournemouth, UK)

  • Mohammad Reza Yeganegi

    (Department of Accounting, Islamic Azad University Central Tehran Branch, Iran)

  • Juncal Cunado

    (University of Navarra, School of Economics, Edificio Amigos, E-31080 Pamplona, Spain)

  • Rangan Gupta

    (Department of Economics, University of Pretoria, Pretoria, South Africa)

Abstract

This study examines the very short, short, medium and long-term forecasting ability of different univariate GARCH models of United Kingdom (UK)'s interest rate volatility, using a long span monthly data from May 1836 to June 2018. The main results show the relevance of considering alternative error distributions to the normal distribution when estimating GARCH-type models. Thus, we obtain that the Asymmetric Power ARCH (A-PARCH) models with skew generalized error distribution are the most accurate models when forecasting UK interest rates, while for the short, medium and longterm term forecasting horizons (h=3 and h=6, h=12), GARCH models with generalized error distribution for the error term are the most accurate models in forecasting UK's interest rates.

Suggested Citation

  • Hossein Hassani & Mohammad Reza Yeganegi & Juncal Cunado & Rangan Gupta, 2018. "Forecasting Interest Rate Volatility of the United Kingdom: Evidence from over 150 Years of Data," Working Papers 201873, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201873
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    Cited by:

    1. Rita Pimentel & Morten Risstad & Sjur Westgaard, 2022. "Predicting interest rate distributions using PCA & quantile regression," Digital Finance, Springer, vol. 4(4), pages 291-311, December.
    2. Hajirahimi, Zahra & Khashei, Mehdi & Etemadi, Sepideh, 2022. "A novel class of reliability-based parallel hybridization (RPH) models for time series forecasting," Chaos, Solitons & Fractals, Elsevier, vol. 156(C).

    More about this item

    Keywords

    interest rates; volatility; GARCH models; forecasting; error distributions;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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