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Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates

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  • PeterTillmann
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    Abstract

    To date the cointegrating properties and the regime-switching behavior of the term structure are two separate strands of the literature. This paper integrates these lines of research and introduces regime shifts into a cointegrated VAR model. We argue that the short run dynamics of the cointegrated model are likely to shift across regimes while the equilibrium relation implied by the expectations hypothesis of the term structure is robust to regime shifts. A Markov-switching VECM approach for U.S. data outperforms a linear VECM. Moreover, the regime shifts in the risk premium and the equilibrium adjustment reflect shifts in monetary policy

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    Bibliographic Info

    Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 53.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:sce:scecf4:53

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    Web page: http://comp-econ.org/
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    Keywords: term structure; expectations hypothesis; cointegration; Markov-switching; monetary policy;

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