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A Comparison of Multi-Factor Term Structure Models for Interbank Rates

Fabozzi, Frank J., Fabozzi, Francesco, Tunaru, Diana (2023) A Comparison of Multi-Factor Term Structure Models for Interbank Rates. Review of Quantitative Finance and Accounting, . ISSN 0924-865X. (doi:10.1007/s11156-023-01147-2) (KAR id:100989)

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In this paper, we present a robust predictive comparison of several continuous-time multi-factor models in the context of interbank rates. Recognizing the specific dynamics of the short-term segment of the yield curve, we examine the U.S. money market by extending two continuous-time frameworks with different factor structures, the Chan-Karolyi-Longstaff-Sanders (CKLS) model and the arbitrage-free dynamic Nelson-Siegel (AFDNS) model. A battery of formal forecasting accuracy tests is employed to select a subset of superior predictive models. Despite a better goodness-of-fit measure, additional factors improve the forecasting performance only for the CKLS family. With implications for monetary policy formulation, we found evidence of two separate maturity segments as the three-factor AFDNS and the five-factor CKLS models outperform parsimonious benchmarks in predicting the interbank rates for very short maturities. Our comparative forecasting results are re-confirmed with stronger out-of-sample performance for the five-factor CKLS model when the post global financial crisis sub-sample is analyzed.

Item Type: Article
DOI/Identification number: 10.1007/s11156-023-01147-2
Uncontrolled keywords: interbank rates, continuous-time models, multi-factor term structure models, forecasting tests
Subjects: H Social Sciences > HG Finance
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Funders: University of Kent (
Depositing User: Diana Tunaru
Date Deposited: 19 Apr 2023 13:44 UTC
Last Modified: 24 Apr 2024 23:00 UTC
Resource URI: (The current URI for this page, for reference purposes)

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