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A nonparametric investigation of the 90‐day t‐bill rate
Author(s) -
Barkoulas John T.,
Baum Christopher F.,
Onochie Joseph
Publication year - 1997
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/s1058-3300(97)90005-7
Subject(s) - nonparametric statistics , mean squared error , predictability , autoregressive model , benchmark (surveying) , statistics , econometrics , mathematics , autoregressive integrated moving average , nonparametric regression , time series , geodesy , geography
We employ a nonlinear, nonparametric method to model the stochastic behavior of changes in the 90‐day U.S. T‐bill rate. The estimation technique is locally weighted regression (LWR), a nearest‐neighbor method, and the forecasting criteria are the root mean square error (RMSE) and mean absolute deviation (MAD) measures. We compare the forecasting performance of the nonparametric fit to the performance of two benchmark linear models: an autoregressive model and a random‐walk‐with‐drift model. The nonparametric fit results in significant improvements in forecasting accuracy as compared to benchmark linear models both in‐sample and out‐of‐sample, thus establishing the presence of substantial nonlinear mean predictability in the 90‐day T‐bill rate.