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The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates

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  • Clarida, Richard
  • Sarno, Lucio
  • Taylor, Mark P
  • Valente, Giorgio

Abstract

We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4835.

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Date of creation: Jan 2005
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Handle: RePEc:cpr:ceprdp:4835

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Keywords: forecasting; markov switching; term structure of interest rates;

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