Forecasting interest rate volatility of the United Kingdom : evidence from over 150 years of data

Abstract

This study examines the very short, short, medium and long-term forecasting ability of different univariate GARCH models of United Kingdom (UK)'s interest rate volatility, using a long span monthly data from May 1836 to June 2018. The main results show the relevance of considering alternative error distributions to the normal distribution when estimating GARCH-type models. Thus, we obtain that the Asymmetric Power ARCH (A-PARCH) models with skew generalized error distribution are the most accurate models when forecasting UK interest rates, while for the short, medium and long-term term forecasting horizons, GARCH models with generalized error distribution for the error term are the most accurate models in forecasting UK's interest rates.