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Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates

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Author Info
Peter Tillmann

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Abstract

To date the cointegrating properties and the regime-switching behavior of the term structure are two separate strands of the literature. This paper integrates these lines of research and introduces regime shifts into a cointegrated VAR model. We argue that the short run dynamics of the cointegrated model are likely to shift across regimes while the equilibrium relation implied by the expectations hypothesis of the term structure is robust to regime shifts. A Markov-switching VECM approach for U.S. data outperforms a linear VECM. Moreover, the regime shifts in the risk premium and the equilibrium adjustment reflect shifts in monetary policy.

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Publisher Info
Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse27_2003.

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Length: 37
Date of creation: Dec 2003
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Handle: RePEc:bon:bonedp:bgse27_2003

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Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
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Web page: http://www.bgse.uni-bonn.de/index.php?id=494

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Related research
Keywords: term structure; expectations hypothesis; cointegration; Markov-switching; monetary policy;

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Find related papers by JEL classification:
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
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