Forecasting U.K. and U.S. interest rates using continuous time term structure models

Abstract

In this paper we compare the forecasting performance of different one factor interest rate models commonly used in the financial markets. In particular we estimate the general CKLS model and the special cases of Merton, Vasicek, CIRSR, Dothan, GBM, Brennan-Schwartz, CIRVR, and CEV models using the approach of Nowman (1997). The models are estimated using weekly Euro-currency data for the U.K. and U.S. over a range of maturities. We find the forecasting performance varies across models and markets.