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Time-series model forecasts and structural breaks: evidence from Spanish pre-EMU interest rates

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Analysis of the future behaviour of economic variables can be biased if structural breaks are not considered. When these structural breaks are present, the in-sample fit of a model gives us a poor guide to ex ante forecast performance. This problem is true for both univariate and multivariate analysis and can be extremely important when co-integration relationships are analysed. The main goal of this article is to analyse the impact of structural breaks on forecast accuracy evaluation. We focus on forecasting several interest rates from the Spanish interbank money market. In order to carry out the analysis, we perform two forecasting exercises: (a) without structural breaks and (b) when structural breaks are explicitly considered. We use new sequential methods in order to estimate change-points in an endogenous way. This method allows us to detect structural breaks in all four rates in May 1993. However, the effects of these breaks are not very strong, since we found scarce gains in forecasting accuracy when the structural breaks are included in the models.
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Document Type: Research Article

Affiliations: 1: Instituto Nacional de Estadistica, Subdireccion General de Estadisticas de los Servicios, Madrid, Spain 2: Depto. de Fundamentos del Analisis Economico II (Economia Cuantitativa), Universidad Complutense, Campus de Somosaguas, 28223, Madrid, Spain

Publication date: 2008-07-01

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