The U.S. housing market remains fragile despite historically low mortgage rates (AARP, July 2, 2010). Since the rate on 30-year mortgages is tied to the 10-year yield on Treasury bonds, it is important to be able to predict this yield accurately. The accompanying table shows a portion of the 10-year yield on Treasury bonds (in %) for 21 trading days in November 2010; the complete data set can be found on the text website, labeled Yields
a. Use a 3-period moving average to make a forecast for December 1, 2010.
b. Use the exponential smoothing method to make a forecast for December 1, 2010. Use α = 0.5.
c. Which of these smoothing methods has a better in sample performance?
d. The actual 10-year yield on December 1, 2010 was 2.96. Was the forecast performance of the two methods consistent with their in-sample performance in part c?