BoE paper proposes fix for flawed rate expectation estimates
Model augmented with overnight indexed swap rates performs better, author says
A model augmented with additional data can help solve some of the problems with existing methods of estimating interest rate expectations, economist Simon Lloyd writes in a new Bank of England staff working paper.
Lloyd says typical dynamic term structure models (DTSMs) used for such estimates suffer from an identification problem, caused by insufficient data. This leads estimates to be “spuriously stable”, and to vary as the sample length increases.
In the paper, Lloyd proposes augmenting
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