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Flexible Threshold Models for Modelling Interest Rate Volatility

Author

Listed:
  • Petros Dellaportas
  • David G. T. Denison
  • Chris Holmes

Abstract

This paper focuses on interest rate models with regime switching and extends previous nonlinear threshold models by relaxing the assumption of a fixed number of regimes. Instead we suggest automatic model determination through Bayesian inference via the reversible jump Markov Chain Monte Carlo (MCMC) algorithm. Moreover, we allow the thresholds in the volatility to be driven not only by the interest rate but also by other economic factors. We illustrate our methodology by applying it to interest rates and other economic factors of the American economy.

Suggested Citation

  • Petros Dellaportas & David G. T. Denison & Chris Holmes, 2007. "Flexible Threshold Models for Modelling Interest Rate Volatility," Econometric Reviews, Taylor & Francis Journals, vol. 26(2-4), pages 419-437.
  • Handle: RePEc:taf:emetrv:v:26:y:2007:i:2-4:p:419-437
    DOI: 10.1080/07474930701220600
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    References listed on IDEAS

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