Threshold Dynamics of Short-term Interest Rates: Empirical Evidence and Implications for the Term Structure
AbstractThis paper studies a nonlinear one-factor term structure model in discrete time. The short-term interest rate follows a self-exciting threshold autoregressive (SETAR) process that allows for shifts in the intercept and the variance. In comparison with a linear model, we find empirical evidence in favour of the threshold model for Germany and the US. Based on the estimated short-rate dynamics we derive the implied arbitrage-free term structure of interest rates. Since analytical solutions are not feasible, bond prices are computed by means of Monte Carlo integration. The resulting term structure captures stylized facts of the data. In particular, it implies a nonlinear relation between long rates and the short rate. Copyright 2008 The Authors Journal compilation 2008 Banca Monte dei Paschi di Siena SpA.
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Bibliographic InfoArticle provided by Banca Monte dei Paschi di Siena SpA in its journal Economic Notes.
Volume (Year): 37 (2008)
Issue (Month): 1 (02)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0391-5026
Other versions of this item:
- Archontakis, Theofanis & Lemke, Wolfgang, 2007. "Threshold dynmamics of short-term interest rates: empirical evidence and implications for the term structure," Discussion Paper Series 1: Economic Studies 2007,02, Deutsche Bundesbank, Research Centre.
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
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Computing in Economics and Finance 2006, Society for Computational Economics
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- Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, Structural Instability and Present Value Calculations," IEPR Working Papers, Institute of Economic Policy Research (IEPR) 06.42, Institute of Economic Policy Research (IEPR).
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- Pesaran, Mohammad Hashem & Pettenuzzo, Davide & Timmermann, Allan, 2006. "Learning, structural instability and present value calculations," Discussion Paper Series 1: Economic Studies 2006,27, Deutsche Bundesbank, Research Centre.
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