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| Measuring and Forecasting Short Rate’s Volatility: Based on Mixed Frequency Short Rate Model with Macro Factor |
| SHANG Yuhuang, ZHENG Tingguo
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Southwestern University of Finance and Economics;
Xiamen University |
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Abstract Many empirical studies show that macroeconomic play important rule in short rate and its volatility behavior. For better fitting and forecasting the volatility of short rate with macroeconomic information, this paper proposes the mixed frequency short rate model with macro factors, namely BHK-MIDAS model. Based on the Chinese data we find that: compared with the traditional short rate model, BHK-MIDAS model exhibits the better in-sample performance. The macro fundamental and price indicator contribute more for the volatility of short rate than that of monetary policy indicators. Furthermore, mixed frequency model can identify the time vary long term component affected by macro factors. Particularly, BHK-MIDAS model presents the better out-sample performance too. It is implied that the macro factors contribute substantially to identification and prediction of short rate’s volatility.
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Received: 23 September 2015
Published: 01 January 1900
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