Advanced Search
MyIDEAS: Login to save this article or follow this journal

Regime Shifts, Risk Premiums in the Term Structure, and the Business Cycle

Contents:

Author Info

  • Ravi Bansal
  • George Tauchen
  • Hao Zhou

Abstract

We examine various dynamic term structure models for monthly US Treasury yields from 1964 to 2001. Of particular interest is the predictability of bond excess returns. Recent evidence indicates that using multiple forward rates can sharply predict future excess returns on bonds; the R2 of this predictability regression can be as high as 30%. In addition, the projection coefficients in these predictability regressions exhibit a tent shaped pattern that relates to the maturity of the forward rate. This dimension of the data in conjunction with the transition dynamics of bond yields (i.e., conditional volatility and cross-correlation of bond yields) poses an serious challenge to term structure models. In this paper we present and estimate a regime-shifts term structure model, and our findings show that this model can account for all aspects of the predictability regression and the transition dynamics of yields. Alternative models, such as affine factor models, cannot account for these features of the data. We find that the regimes in the model are related to the NBER business-cycle indicator.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.ingentaconnect.com/content/asa/jbes/2004/00000022/00000004/art00003
File Function: full text
Download Restriction: Access to full text is restricted to subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 22 (2004)
Issue (Month): (October)
Pages: 396-409

as in new window
Handle: RePEc:bes:jnlbes:v:22:y:2004:p:396-409

Contact details of provider:
Web page: http://www.amstat.org/publications/jbes/index.cfm?fuseaction=main

Order Information:
Web: http://www.amstat.org/publications/index.html

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September.
  2. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, vol. 77(4), pages 680-92, September.
  3. Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
  4. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
  5. Roberds, William & Whiteman, Charles H., 1999. "Endogenous term premia and anomalies in the term structure of interest rates: Explaining the predictability smile," Journal of Monetary Economics, Elsevier, vol. 44(3), pages 555-580, December.
  6. John H. Cochrane & Monika Piazzesi, 2002. "Bond Risk Premia," NBER Working Papers 9178, National Bureau of Economic Research, Inc.
  7. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers 0153, National Bureau of Economic Research, Inc.
  8. Ronald Gallant, A. & Tauchen, George, 1999. "The relative efficiency of method of moments estimators1," Journal of Econometrics, Elsevier, vol. 92(1), pages 149-172, September.
  9. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  10. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  11. Gallant, A. Ronald & Tauchen, George, 1996. "Which Moments to Match?," Econometric Theory, Cambridge University Press, vol. 12(04), pages 657-681, October.
  12. Cai, Jun, 1994. "A Markov Model of Switching-Regime ARCH," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 309-16, July.
  13. Dong-Hyun Ahn & Robert F. Dittmar, 2002. "Quadratic Term Structure Models: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 15(1), pages 243-288, March.
  14. Bansal, Ravi & Gallant, A. Ronald & Hussey, Robert & Tauchen, George, 1995. "Nonparametric estimation of structural models for high-frequency currency market data," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 251-287.
  15. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bes:jnlbes:v:22:y:2004:p:396-409. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.