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A General Equilibrium Model Of The Term Structure Of Interest Rates Under Regime-Switching Risk

  • SHU WU

    ()

    (Department of Economics at The University of Kansas, Summerfield Hall 213, Lawrence, KS 66045, USA)

  • YONG ZENG

    ()

    (Department of Mathematics and Statistics at University of Missouri at Kansas City, Kansas City, MO 64110, USA)

Registered author(s):

This paper develops a general equilibrium model of the term structure of interest rates in the presence of the systematic risk of regime shifts. The model elucidates the economic nature of the regime-shift risk premium and introduces a new source of time-variation in bond returns. A closed-form solution for the term structure of interest rates is obtained under an affine model using log-linear approximation. The model is estimated by Efficient Method of Moments. The regime-switching risk is found to be statistically significant and mostly affect the long-end of the yield curve.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 08 (2005)
Issue (Month): 07 ()
Pages: 839-869

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Handle: RePEc:wsi:ijtafx:v:08:y:2005:i:07:p:839-869
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