Martingales and efficient forecasts of effective mortgage rates |
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Authors: | William Reichenstein |
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Institution: | (1) College of Business Administration, University of North Texas, 76203 Denton, Texas, USA |
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Abstract: | Economic theory and empirical evidence indicate that the optimal near-term forecast of a long-term rate is (approximately) today's rate; the no-change model should provide excellent near-term forecasts of a long-term rate. This article estimates the longest forecast horizon over which no-change predictions of each of three mortgage-related interest rates pass a series of quality tests. The empirical results reject the optimality of no-change predictions of the one-year Treasury bill rate for all forecast horizons. Since October 1979, the tests support the hypothesis that no-change predictions of the 30-year conventional home mortgage and GNMA rates are optimal for forecast horizons of up to three-quarters-ahead. |
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Keywords: | efficiency no-change forecasts martingale GNMA conventional mortgage rate |
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