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Cointegration and Regime-Switching Risk Premia in the US Term Structure of Interest Rates

  • Peter Tillmann

To date the cointegrating properties and the regime-switching behavior of the term structure are two separate strands of the literature. This paper integrates these lines of research and introduces regime shifts into a cointegrated VAR model. We argue that the short-run dynamics of the cointegrated model are likely to shift across regimes while the equilibrium relation implied by the expectations hypothesis of the term structure is robust to regime shifts. A Markov-switching VECM approach for U.S. data outperforms a linear VECM. We find significant shifts in risk premia and interest rate volatility. These regime shifts reflect changing inflation expectations and shifts in monetary policy, respectively

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Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 26.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:nasm04:26
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