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A Regime Switching Macro-finance Model of the Term Structure

  • ZHU Xiaoneng

    (Division of Economics,School of Humanities and Social Sciences, Nanyang Technological University, Singapore)

  • Shahidur RAHMAN

    (Nanyang Technological University, Singapore)

Registered author(s):

    This paper presents and estimates a regime switching macro-finance model of the term structure with latent and macroeconomic factors. The joint dynamics of the yield and macro factors are examined simultaneously. Both the canonical yields-only model and the macro-finance model capture two regimes in the state equation that relate to a turbulent period and a tranquil period. Statistically, the formal tests indicate signi?cant bidirectional linkages between the yield curve and economic activity. I also examine how the yield factors respond to shocks to the macro factors and the feedback of the macro factors to the yield curve. Finally, I find that the theoretical level implied by the expectations hypothesis is a good approximation of the actual level factor in the regime-shifting macro-fi?nance model framework.

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    File URL: http://www.ntu.edu.sg/hss2/egc/wp/2009/2009-01.pdf
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    Paper provided by Nanyang Technological University, School of Humanities and Social Sciences, Economic Growth Centre in its series Economic Growth Centre Working Paper Series with number 0901.

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    Length: 35 pages
    Date of creation: Jan 2009
    Date of revision:
    Handle: RePEc:nan:wpaper:0901
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    Web page: http://egc.hss.ntu.edu.sg/

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    7. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
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