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The nonlinear dynamics of interest rates

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  • Philip A. Shively
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    Abstract

    This note evaluates the nonlinear dynamics of interest rates using a three-regime threshold random-walk model and daily, annualized 3-month, 6-month, 1-year, 5-year, 10-year and 30-year US Treasury rates from 4 January 1971 to 31 December 2002. The idea behind this model is that loans occur in all three regimes, but there is an added incentive to lend (borrow) money after interest rates rise (fall) by a large amount. This model finds statistically-significant evidence that interest rates are consistent with a regime-reverting process where on average, interest rates in the two outer regimes revert to the middle regime. This regime-reverting process implies that interest rates have a stabilizing force consistent with a reversal effect.

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    Bibliographic Info

    Article provided by Taylor and Francis Journals in its journal Applied Financial Economics Letters.

    Volume (Year): 1 (2005)
    Issue (Month): 2 (March)
    Pages: 71-74

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    Handle: RePEc:taf:apfelt:v:1:y:2005:i:2:p:71-74

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    1. 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.
    2. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
    3. David A. Chapman & Neil D. Pearson, 2000. "Is the Short Rate Drift Actually Nonlinear?," Journal of Finance, American Finance Association, vol. 55(1), pages 355-388, 02.
    4. Chiang, Thomas C & Chiang, Jeanette Jin, 1999. " On the Nonlinear Specifications of Short-Term Interest Rate Behavior: Evidence from Euro-Currency Markets," Review of Quantitative Finance and Accounting, Springer, vol. 12(4), pages 351-70, June.
    5. Bierens, Herman J., 1997. "Testing the unit root with drift hypothesis against nonlinear trend stationarity, with an application to the US price level and interest rate," Journal of Econometrics, Elsevier, vol. 81(1), pages 29-64, November.
    6. Yacine Ait-Sahalia, 1995. "Testing Continuous-Time Models of the Spot Interest Rate," NBER Working Papers 5346, National Bureau of Economic Research, Inc.
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