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On Model Selection and Markov-Switching: An Empirical Examination of Term Structure Models with Regime Shifts

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  • John Driffill
  • Turalay Kenc
  • Martin Sola

    ()

  • Fabio Spagnolo

Abstract

We examine several discrete-time term-structure models, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that inquiring which parameters of the short-term interest rate equation are allowed to switch is crucial. Failing to do so may result in switching pricing models that produce no improvement (in terms of pricing) with respect to 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 Universidad Torcuato Di Tella in its series Department of Economics Working Papers with number 2008-04.

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Length: 34 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:udt:wpecon:2008-04

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Web page: http://www.utdt.edu/ver_contenido.php?id_contenido=439&id_item_menu=568
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Keywords: Term structure of interest rates; bond yields; stochastic discount factor; and regime switching.;

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References

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Cited by:
  1. Zeno Rotondi, 2006. "The Macroeconomy and the Yield Curve: A Review of the Literature with Some New Evidence," Giornale degli Economisti, GDE (Giornale degli Economisti e Annali di Economia), Bocconi University, vol. 65(2), pages 193-224, November.

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