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On Model Selection and Markov Switching: A Empirical Examination of Term Structure Models with Regime Shifts

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Author Info
Driffill, John
Kenc, Turalay
Sola, Martin
Spagnolo, Fabio

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Abstract

We examine several continuous-time term-structure models, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that inquiring which parameters of the short-term interest rate equation are allowed to switch is crucial, as failing to do so may result in switching pricing models that produce no improvement (in terms of pricing) with respect to models which do not allow for regime switching, even when there are clear breaks in the data.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4165.

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Date of creation: Jan 2004
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Handle: RePEc:cpr:ceprdp:4165

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Related research
Keywords: bond yields; regime switching; stochastic discount factor/pricing kernel; term structure of interest rates;

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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
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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(explanations, 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.)

  1. Zeno Rotondi, 2006. "The Macroeconomy and the Yield Curve: A Review of the Literature with Some New Evidence," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 193-224, November. [Downloadable!]
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