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Switching VARMA Term Structure Models - Extended Version

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  • Monfort, A.
  • Pegoraro, F.

Abstract

The purpose of the paper is to propose a global discrete-time modeling of the term structure of interest rates able to capture simultaneously the following important features : (i) an historical dynamics of the factor driving term structure shapes involving several lagged values, and switching regimes; (ii) a specification of the stochastic discount factor (SDF) with time-varying and regime dependent risk-premia; (iii) explicit or quasi explicit formulas for zero-coupon bond and interest rate derivative prices; (iv) the positivity of the yields at each maturity. The first family of models we develop is given by the Switching Autoregressive Normal (SARN) and the Switching Vector Autoregressive Normal (SVARN) Factor-Based Term Structure Models of order p. The second family of models we study is given by the Switching Autoregressive Gamma (SARG) and the Switching Vector Autoregressive Gamma (SVARG) Factor-Based Term Structure Models of order p. Regime shifts are described by a Markov chain with (historical) non-homogeneous transition probabilities.

Suggested Citation

  • Monfort, A. & Pegoraro, F., 2007. "Switching VARMA Term Structure Models - Extended Version," Working papers 191, Banque de France.
  • Handle: RePEc:bfr:banfra:191
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    Cited by:

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    2. Monfort, Alain & Pegoraro, Fulvio, 2012. "Asset pricing with Second-Order Esscher Transforms," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1678-1687.
    3. Malik, Sheheryar & Meldrum, Andrew, 2016. "Evaluating the robustness of UK term structure decompositions using linear regression methods," Journal of Banking & Finance, Elsevier, vol. 67(C), pages 85-102.
    4. H. Bertholon & A. Monfort & F. Pegoraro, 2008. "Econometric Asset Pricing Modelling," Journal of Financial Econometrics, Oxford University Press, vol. 6(4), pages 407-458, Fall.
    5. Alain Monfort & Jean-Paul Renne, 2011. "Credit and Liquidity Risks in Euro-area Sovereign Yield Curves," Working Papers 2011-26, Center for Research in Economics and Statistics.
    6. Pegoraro, F. & Siegel, A. F. & Tiozzo Pezzoli, L., 2014. "Specification Analysis of International Treasury Yield Curve Factors," Working papers 490, Banque de France.
    7. Chiara Sabelli & Michele Pioppi & Luca Sitzia & Giacomo Bormetti, 2014. "Multi-curve HJM modelling for risk management," Papers 1411.3977, arXiv.org, revised Oct 2015.
    8. Alain Monfort & Jean-Paul Renne, 2013. "Default, Liquidity, and Crises: an Econometric Framework," Journal of Financial Econometrics, Oxford University Press, vol. 11(2), pages 221-262, March.
    9. Gourieroux, C. & Monfort, A. & Sufana, R., 2010. "International money and stock market contingent claims," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1727-1751, December.
    10. Bruno Feunou & Jean-Sébastien Fontaine, 2018. "Bond Risk Premia and Gaussian Term Structure Models," Management Science, INFORMS, vol. 64(3), pages 1413-1439, March.
    11. Timothy M. Christensen, 2014. "Nonparametric identification of positive eigenfunctions," CeMMAP working papers CWP37/14, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    12. Juneja, Januj, 2014. "Term structure estimation in the presence of autocorrelation," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 119-129.
    13. Alain Monfort & Fulvio Pegoraro, 2006. "Multi-Lag Term Structure Models with Stochastic Risk Premia," Working Papers 2006-29, Center for Research in Economics and Statistics.
    14. Hansen, Anne Lundgaard, 2021. "Modeling persistent interest rates with double-autoregressive processes," Journal of Banking & Finance, Elsevier, vol. 133(C).
    15. Gourieroux, Christian & Sufana, Razvan, 2011. "Discrete time Wishart term structure models," Journal of Economic Dynamics and Control, Elsevier, vol. 35(6), pages 815-824, June.
    16. Timothy M. Christensen, 2014. "Nonparametric identification of positive eigenfunctions," CeMMAP working papers 37/14, Institute for Fiscal Studies.
    17. Christian Kascha & Carsten Trenkler, 2011. "Cointegrated VARMA models and forecasting US interest rates," ECON - Working Papers 033, Department of Economics - University of Zurich.
    18. Gourieroux, C. & Monfort, A., 2013. "Linear-price term structure models," Journal of Empirical Finance, Elsevier, vol. 24(C), pages 24-41.
    19. Augustyniak, Maciej & Badescu, Alexandru & Bégin, Jean-François, 2023. "A discrete-time hedging framework with multiple factors and fat tails: On what matters," Journal of Econometrics, Elsevier, vol. 232(2), pages 416-444.
    20. Alain Monfort & Olivier Féron, 2012. "Joint econometric modeling of spot electricity prices, forwards and options," Review of Derivatives Research, Springer, vol. 15(3), pages 217-256, October.
    21. Massimo Guidolin, 2013. "Markov switching models in asset pricing research," Chapters, in: Adrian R. Bell & Chris Brooks & Marcel Prokopczuk (ed.), Handbook of Research Methods and Applications in Empirical Finance, chapter 1, pages 3-44, Edward Elgar Publishing.

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    More about this item

    Keywords

    Affine Term Structure Models ; Stochastic Discount Factor ; Car processes ; Switching Regimes ; VARMA processes ; Lags ; Positivity ; Derivative Pricing.;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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