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The role of Regime Shifts in the Term Structure of Interest Rates: Further evidence from an Emerging Market

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  • Saltoglu, Burak
  • Yazgan, Ege

Abstract

In this paper, we investigate the interrelations among Turkish interest rates with different maturities by using a regime switching Vector Error Correction (VECM) model. We find a long run equilibrium relationship among interest rates with various maturities. Furthermore we conclude that term structure dynamics exhibit significant nonlinearity. Forecasting experiment also reveals that the nonlinear term structure models do fare better than other linear specifications. However, we cannot conclude that interest rate adjustments are made in an asymmetric way in the long run equilibrium.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 18741.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:18741

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Keywords: Term Structure of Interest Rates; Regime Switching; Forecasting; Foreacast Evaluation; Cointegration;

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  1. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, Econometric Society, vol. 59(6), pages 1551-80, November.
  2. Massimiliano Marcellino & Grayham E. Mizon & Hans-Martin Krolzig, 2002. "A Markov-switching vector equilibrium correction model of the UK labour market," Empirical Economics, Springer, Springer, vol. 27(2), pages 233-254.
  3. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
  4. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 55(3), pages 313-28, August.
  5. Richard Clarida & Lucio Sarno & Mark Taylor & Giorgio Valente, 2001. "The Out-of-Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond," NBER Working Papers 8601, National Bureau of Economic Research, Inc.
  6. Osmani Teixeira De Carvalho Guillen & Benjamin M. Tabak, 2009. "Characterising the Brazilian term structure of interest rates," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 2(2), pages 103-114.
  7. Giorgio Valente & Mark Taylor & Lucio Sarno & Richard Clarida, 2004. "The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates," Working Papers, Warwick Business School, Finance Group wp04-13, Warwick Business School, Finance Group.
  8. Harbo, Ingrid, et al, 1998. "Asymptotic Inference on Cointegrating Rank in Partial Systems," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 16(4), pages 388-99, October.
  9. Helmut Lütkepohl & Pentti Saikkonen & Carsten Trenkler, 2001. "Maximum eigenvalue versus trace tests for the cointegrating rank of a VAR process," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 4(2), pages 8.
  10. Masao Ogaki & Julio Santaella, 1999. "The Exchange Rate and the Term Structure of Interest Rates in Mexico," Working Papers, Ohio State University, Department of Economics 99-21, Ohio State University, Department of Economics.
  11. C. Emre Alper & K. Kazimov & A. Akdemir, 2007. "Forecasting the term structure of interest rates for Turkey: a factor analysis approach," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 17(1), pages 77-85.
  12. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 813-36, July.
  13. Giorgio Valente & Lucio Sarno, 2004. "Empirical Exchange Rate Models and Currency Risk: Some Evidence from Density Forecasts," Working Papers, Warwick Business School, Finance Group wp04-10, Warwick Business School, Finance Group.
  14. Drakos, Konstantinos, 2001. "Monetary policy and the yield curve in an emerging market: the Greek case," Emerging Markets Review, Elsevier, Elsevier, vol. 2(3), pages 244-262, September.
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Cited by:
  1. Kang, Bo Soo & Ryu, Doojin & Ryu, Doowon, 2014. "Phase-shifting behaviour revisited: An alternative measure," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 401(C), pages 167-173.

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