Introduction
In this corporate world interest rates plays a vital role in the financial markets. Predicting future interest rates is a difficult task since they are dependent on many factors including regimes of countries and many other aspects. On the other hand, it also affects our standard of living, hence it is necessary to look upon.
Predicting future interest rates can be done in various ways since we are advancing more in technology, and it is playing a big role in financial markets. The mathematical way is one of the traditional ways chosen by financial experts to forecast interest rates. While talking about technology the machine learning and artificial intelligence system made it easier to solve complex data and provide an accurate result in no time.
Understanding Interest Rates
Since they impact our economic lifestyle, it is mandatory to understand interest rates to improve the standard of living.
Investors depend on the interest rate to get higher return investments whereas a borrower keeps track of interest rates so that he/she won’t pay more money than the final amount. The present value of money is calculated through interest rates and future money. Prices of items are dependent on interest rates that we consume daily. Bonds and mortgage values rely on interest rates. Banks provides loans with an interest rate and the same goes for money lenders. Finally, interest rates help in the economic development of the country.
As we can see, interest rates impact not only an individual standard of living, but the whole country. Therefore it is important to forecast the interest rates which will not affect our economic status in the end.
Predict Future Interest Rates
The mathematical concept can be determined to predict future interest rates. They involve mathematical calculations but here we will look upon some hypothetical theories that will enlighten you with the idea of predicting. Interest rates change with time and they are purely stochastic. They are classified into two processes:
Markov Stochastic Process:
Unlike others, the Markov Stochastic Process does not depend on past values; the current value is considered and the calculations are determined through probability. Hence, the prediction includes an understanding of probability distribution which has mean and variance. Mean is the average value and variance is the dispersion of mean.
For the Markov Stochastic Process, the importance is given to the current values to predict future interest rates. However, they are hypothetical and might change over time.
Wiener Process to Predict Future Interest Rates
Wiener Process is a specialized form of the Markov Process, and here normally distributed variables are involved. In the Markov process, it means a change of 0 and variance rate to 1, it is the Wiener Process. The variable gets a change in two different time steps and is independent. The formula which the variable follows:
Variable Change = Normal Distribution Number(mean=0, variance=1) * Sq rt(Change In Time)
Summary
Predicting future interest rates is difficult as there are various aspects to look after. However, these two methods give a brief idea about the change in graph of interest rate over time but getting an accurate result is still a bottleneck. With the advancement of technology, the machine learning algorithm will make the task much easier so that people can improve their standard of living.
