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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 relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach 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 resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample 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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