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A nonlinear DSGE model of the term structure with regime shifts

  • Oreste Tristani

    (European Central Bank)

  • Gianni Amisano

    (European Central Bank)

We construct and estimate the term structure implications of a small DSGE model with nominal rigidities in which the laws of motion of the structural shocks are subject to stochastic regime shifts. We demonstrate that, to a second order approximation, switching regimes generate time-varying risk premia. We then estimate the model on US data relying on information from both macroeconomic variables and the term structure. Our results support the specification with regime-switching: heteroskedasticity is a clear feature of the model's residuals and the regimes have intuitively appealing features. The model also generates non-negligible time-variability in excess holding period returns.

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Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 234.

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Date of creation: 2010
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Handle: RePEc:red:sed010:234
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