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MODELLING AUSTRALIAN BANK BILL RATES: A KALMAN FILTER APPROACH
Author(s) -
Bhar Ramaprasad
Publication year - 1996
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1996.tb00295.x
Subject(s) - kalman filter , econometrics , constant (computer programming) , term (time) , contrast (vision) , regression , computer science , statistics , economics , mathematics , artificial intelligence , physics , quantum mechanics , programming language
This paper examines the applicability of the Kalman Filter technique to forecast future spot interest rates, based upon the expectation hypothesis of the term structure of interest rates, in the Australian bank bill market. In this approach, regression estimates are based on the last period's estimate together with data from the current period. In contrast to constant parameter models, this allows effective use of information underlying the process driving the evolution of the parameters. For the period tested, forecasting accuracy of such a time‐varying parameter model shows marked improvement over a constant parameter model.