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The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates

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  • Giorgio Valente
  • Mark Taylor
  • Lucio Sarno
  • Richard Clarida

Abstract

We examine the term structure of interest rates for the United States, Germany, and Japan over the period 1982–2000, using a nonlinear multivariate vector equilibrium correction-modeling framework that allows for asymmetric adjustment and regime shifts. The model has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The empirical models fit well, display regime switches closely correlated with key monetary policy variables, and have good forecasting properties.

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Paper provided by Warwick Business School, Finance Group in its series Working Papers with number wp04-13.

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Date of creation: 2004
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Handle: RePEc:wbs:wpaper:wp04-13

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