Forecast of Short Run Nominal Interest Rates in Chile: Complex vs. Naive Models

Franco Parisi (1)
(1) , Chile

Abstract

This paper explores the explanatory and predictive capability of one-factor theoretical interest rate modeis and a naive AR(1) model for the short-term interest rate in Chile. The theoretical models outperform the naive alternative: the CKLS model correctly predicts 70% of the time the direction of change in interest rates while the naive model does it only 50% of the time. Moreover, the forecast error for the interest rate is in the range of 0.21% to 0.43% in the theoretical models versus a range of 0.67% to 0.76% in the case of the AR(1) models. Interest rates also display mean reversion.

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Authors

Franco Parisi
Parisi, F. . (1999). Forecast of Short Run Nominal Interest Rates in Chile: Complex vs. Naive Models. ECONOMÍA CHILENA, 2(3), 027–040. https://doi.org/10.36923/economa.v2i3.14

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