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Switching VARMA Term Structure Models - Extended Version

  • Alain Monfort

    (Crest)

  • Fulvio Pegoraro

    (Crest)

The purpose of the paper is to propose a global discrete-time modeling of the term structure of interest ratesable to capture simultaneously the following important features : (i) an historical dynamics of the factor drivingterm structure shapes involving several lagged values, and switching regimes; (ii) a specification of the stochasticdiscount factor (SDF) with time-varying and regime-dependent risk-premia; (iii) explicit or quasi explicit formulasfor zero-coupon bond and interest rate derivative prices; (iv) the positivity of the yields at each maturity. The firstfamily of models we develop is given by the Switching Autoregressive Normal (SARN) and the Switching VectorAutoregressive Normal (SVARN) Factor-Based Term Structure Models of order p. The second family of models westudy 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.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2007-19.

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Length: 48
Date of creation: 2007
Date of revision:
Handle: RePEc:crs:wpaper:2007-19
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