Ulf Erlandsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden
Abstract: This paper examines the forecasting properties of a Markov regime-switching model applied to Swedish interest rate volatility. A Monte Carlo testing procedure is used to arrive at a three state specification that is able to capture the high degree of leptokurtosis in the data without additional modelling of conditional heteroskedasticity. The final specification is shown to possess good forecasting properties both in general and for specific samples and horizons, something that the benchmark processes are unable to achieve.
20 pages, First version: February 26, 2002. Revised: March 4, 2005. Earlier revisions: August 26, 2003.
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