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Regime Switches in Swedish Interest Rates

  • Erlandsson, Ulf

    (Department of Economics, Lund University)

This paper examines the forecasting properties of a Markov regime-switching model applied to Swedish interest rate volatility. A Monte Carlo testing procedure is used to arrive at a three state specification that is able to capture the high degree of leptokurtosis in the data without additional modelling of conditional heteroskedasticity. The final specification is shown to possess good forecasting properties both in general and for specific samples and horizons, something that the benchmark processes are unable to achieve.

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Paper provided by Lund University, Department of Economics in its series Working Papers with number 2002:5.

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Length: 20 pages
Date of creation: 26 Feb 2002
Date of revision: 26 Aug 2003
Handle: RePEc:hhs:lunewp:2002_005
Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
Phone: +46 +46 222 0000
Fax: +46 +46 2224613
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  1. René Garcia, 1995. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," CIRANO Working Papers 95s-07, CIRANO.
  2. Ahlstedt, M., 1998. "Analysis of Financial Risks in a GARCH Framework," University of Helsinki, Department of Economics e:11, Department of Economics.
  3. Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
  4. Kim, Chang-Jin, 1994. "Dynamic linear models with Markov-switching," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 1-22.
  5. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  6. Ellingsen, Tore & Söderström, Ulf, 1998. "Monetary Policy and Market Interest Rates," SSE/EFI Working Paper Series in Economics and Finance 242, Stockholm School of Economics, revised 08 Mar 1999.
  7. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  8. Hans Dewachter, 1996. "Modelling interest rate volatility: Regime switches and level links," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(2), pages 236-258, September.
  9. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
  10. Christiansen, Charlotte & Lund, Jesper, 2002. "Revisiting the shape of the yield curve: the effect of interest rate volatility," Finance Working Papers 02-3, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  11. Dahlquist, Magnus & Gray, Stephen F., 2000. "Regime-switching and interest rates in the European monetary system," Journal of International Economics, Elsevier, vol. 50(2), pages 399-419, April.
  12. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
  13. Rydén, Tobias & Teräsvirta, Timo & Åsbrink, Stefan, 1996. "Stylized Facts of Daily Return Series and the Hidden Markov Model," SSE/EFI Working Paper Series in Economics and Finance 117, Stockholm School of Economics.
  14. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September.
  15. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  16. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  17. Thomas Mikosch & Catalin Starica, 2004. "Long range dependence effects and ARCH modelling," Econometrics 0412004, EconWPA.
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