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Regime Switching in the Yield Curve

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Abstract

The paper investigates the effect of interest-rate variance on the shape of the yield curve using a bivariate 2-state Markov switching model for the short-rate changes and the yield curve slope. The two states are characterized by the variance of the shortrate changes: Low and high variance. In the high variance regime the yield curve becomes steeper with the interest-rate variance, in the low variance regime the slope is independent hereof. A non-switching specification amounts to averaging across the two states. The economy is in the high variance state during unusual economic periods.

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Bibliographic Info

Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 02-13.

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Length: 31 pages
Date of creation: 09 May 2002
Date of revision:
Handle: RePEc:hhb:aarfin:2002_013

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Keywords: Interest-rate variance; Regime switching; SWARCH; Yield curve; Yield curve slope;

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References

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Cited by:
  1. Charlotte Christiansen, 2007. "Level-ARCH Short Rate Models with Regime Switching: Bivariate Modeling of US and European Short Rates," CREATES Research Papers 2007-05, School of Economics and Management, University of Aarhus.
  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. Daniel R. Smith & Christophe Parignon, 2004. "Modeling Yield-Factor Volatility," Econometric Society 2004 Australasian Meetings 307, Econometric Society.

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