A General Equilibrium Model Of The Term Structure Of Interest Rates Under Regime-Switching Risk
AbstractThis paper develops a general equilibrium model of the term structure of interest rates in the presence of the systematic risk of regime shifts. The model elucidates the economic nature of the regime-shift risk premium and introduces a new source of time-variation in bond returns. A closed-form solution for the term structure of interest rates is obtained under an affine model using log-linear approximation. The model is estimated by Efficient Method of Moments. The regime-switching risk is found to be statistically significant and mostly affect the long-end of the yield curve.
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Bibliographic InfoArticle provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.
Volume (Year): 08 (2005)
Issue (Month): 07 ()
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Other versions of this item:
- Yong Zeng & Shu Wu, 2004. "A General Equilibrium Model of the Term Structure of Interest Rates under Regime-switching Risk," Econometric Society 2004 North American Summer Meetings 304, Econometric Society.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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