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An Empirical Examination of Term Structure Models with Regime Shifts

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  • Kenc, Turalay

    (Imperial College)

  • John Driffill
  • Martin Sola

Abstract

We examine several continuous-time term structure models in which the short rate is subject both to continuous changes and to discrete shifts. Several regime-switching term structure models are developed, with regime-dependence in various combinations of their drift and diffusion parameters. We examine their predictive power. Our empirical analysis suggests that it is important to attempt to specify the switching model correctly: badly parameterized switching models may not be an improvement (in terms of pricing) over models which do not allow for regime switching, even when there are clear breaks in the data.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 119.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:119

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Web page: http://www.res.org.uk/society/annualconf.asp
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Keywords: term structure of interest rates; bond yields; stochastic discount factor/pricing kernel; regime switching;

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Cited by:
  1. Jardet, Caroline & Monfort, Alain & Pegoraro, Fulvio, 2013. "No-arbitrage Near-Cointegrated VAR(p) term structure models, term premia and GDP growth," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 389-402.
  2. Alain Monfort & Fulvio Pegoraro, 2007. "Switching VARMA Term Structure Models - Extended Version," Working Papers 2007-19, Centre de Recherche en Economie et Statistique.
  3. Christina Erlwein & Rogemar Mamon, 2009. "An online estimation scheme for a Hull–White model with HMM-driven parameters," Statistical Methods and Applications, Springer, vol. 18(1), pages 87-107, March.

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