Measuring Forecast Uncertainty of Corporate Bond Spreads by Bonferroni-Type Prediction Bands

Abstract

The recent financial crisis has seen huge swings in corporate bond spreads. It
is analyzed what quality VAR-based forecasts would have had prior and during
the crisis period. Given that forecasts of the mean of interest rates or financial
market prices are subject to large uncertainty independent of the class of models
used, major emphasis is put on the quality of measures of forecast uncertainty.
The VAR considered is based on a model first suggested in the literature
in 2005. In a rolling window analysis, both the model’s forecasts and joint
prediction bands are calculated making use of recently proposed methods.
Besides a traditional analysis of the forecast quality, the performance of the
proposed prediction bands is assessed. It is shown that the actual coverage
of joint prediction bands is superior to the coverage of naïve prediction bands
constructed pointwise.