The nonlinear dynamics of interest rates
This note evaluates the nonlinear dynamics of interest rates using a three-regime threshold random-walk model and daily, annualized 3-month, 6-month, 1-year, 5-year, 10-year and 30-year US Treasury rates from 4 January 1971 to 31 December 2002. The idea behind this model is that loans occur in all three regimes, but there is an added incentive to lend (borrow) money after interest rates rise (fall) by a large amount. This model finds statistically-significant evidence that interest rates are consistent with a regime-reverting process where on average, interest rates in the two outer regimes revert to the middle regime. This regime-reverting process implies that interest rates have a stabilizing force consistent with a reversal effect.
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Volume (Year): 1 (2005)
Issue (Month): 2 (March)
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References listed on IDEAS
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- David A. Chapman & Neil D. Pearson, 2000.
"Is the Short Rate Drift Actually Nonlinear?,"
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"Testing Continuous-Time Models of the Spot Interest Rate,"
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Society for Financial Studies, vol. 9(2), pages 385-426.
- Yacine Ait-Sahalia, 1995. "Testing Continuous-Time Models of the Spot Interest Rate," NBER Working Papers 5346, National Bureau of Economic Research, Inc.
- Hamilton, James D., 1988. "Rational-expectations econometric analysis of changes in regime : An investigation of the term structure of interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 385-423.
- Bierens, Herman J., 1997. "Testing the unit root with drift hypothesis against nonlinear trend stationarity, with an application to the US price level and interest rate," Journal of Econometrics, Elsevier, vol. 81(1), pages 29-64, November.
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