Abstract
This study aims to test the feasibility of using a data set of 90-day
bank bill forward rates from the Australian market to predict spot interest rates. To
achieve this goal I utilized the application of Kalman filter in a state space model with
time-varying state variable. It is documented that in the case of short-term interest
rates,the state space model yields robust predictive power. In addition, this predictive
power of implied forward rate is heavily impacted by the existence of a time-varying
risk premium in the term structure.
Long H. Vo. (2014) Application of Kalman Filter on Modelling Interest Rates, Journal of Management Sciences, Volume 1, Issue 1.
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