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

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  • Peter Tillmann

Abstract

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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  • Peter Tillmann, 2004. "Cointegration and Regime-Switching Risk Premia in the US Term Structure of Interest Rates," Econometric Society 2004 North American Summer Meetings 26, Econometric Society.
    • Handle: RePEc:ecm:nasm04:26
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    More about this item

    Keywords

    term structure; expectations hypothesis; cointegration; Markov-switching; monetary policy;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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