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Future interest rate levels can be better predicted

26.09.2007
The ability to make accurate predictions for returns and risks is very important on the financial markets.

In his dissertation “Modeling and Forecasting Stock Return Volatility and the Term Structure of Interest Rates” Michiel de Pooter investigates the predictability of the uncertainty in future stock returns.

He also combines models to better be able to predict interest rate levels. This method proved to work well for the short and medium term. De Pooter will defend his dissertation at the Erasmus University Rotterdam on 27 September 2007.

The uncertainty (also called volatility or risk) in future stock returns is a celebrated notion because that uncertainty, in contrast to returns themselves, cannot be measured directly. De Pooter demonstrates in his dissertation that volatility becomes better measurable to a great extent if estimates are used that are based on yields that are often measured.

De Pooter discusses empirical models based on these so-called “realised” volatility estimates and shows that these models predict the volatility of stock returns well. In the dissertation it is demonstrated that investors can lower the risks in their portfolios using these predictions, and consequently book better results.

In his dissertation De Pooter also investigates the predictability of the level of future interest rates. The height of short term and long term interest rates are strongly reliant on the state of the economy and are partly determined by the actions of central banks, like the US Federal Reserve and the European Central Bank. De Pooter shows that empirical models generate good predictions for interest rates in the short and medium term, especially when the predictions from different models are combined.

Yvette Nelen | alfa
Further information:
http://www.eur.nl/english

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