Term structure of interest rates with regime shifts
AbstractWe develop a term structure model where the short interest rate and the market price of risks are subject to discrete regime shifts. Empirical evidence from Efficient Method of Moments estimation provides considerable support for the regime shifts model. Standard models, which include affine specifications with up to three factors, are sharply rejected in the data. Our diagnostics show that only the regime shifts model can account for the well documented violations of the expectations hypothesis, the observed conditional volatility, and the conditional correlation across yields. We find that regimes are intimately related to business cycles.
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Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2001-46.
Date of creation: 2001
Date of revision:
Other versions of this item:
- Ravi Bansal & Hao Zhou, 2002. "Term Structure of Interest Rates with Regime Shifts," Journal of Finance, American Finance Association, vol. 57(5), pages 1997-2043, October.
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