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Flexible Threshold Models for Modelling Interest Rate Volatility

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

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    Article provided by Taylor & Francis Journals in its journal Econometric Reviews.

    Volume (Year): 26 (2007)
    Issue (Month): 2-4 ()
    Pages: 419-437

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    Handle: RePEc:taf:emetrv:v:26:y:2007:i:2-4:p:419-437
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    1. Gary Koop & Simon M. Potter, 1998. "Dynamic asymmetries in US unemployment," ESE Discussion Papers 15, Edinburgh School of Economics, University of Edinburgh.
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    8. Brenner, Robin J. & Harjes, Richard H. & Kroner, Kenneth F., 1996. "Another Look at Models of the Short-Term Interest Rate," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(01), pages 85-107, March.
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    12. LUBRANO, Michel, 2000. "Bayesian non-linear modellings of the short term US interest rate: the help of non-parametric tools," CORE Discussion Papers 2000038, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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