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Regime Switching in the Yield Curve

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The paper investigates the effect of interest-rate variance on the shape of the yield curve using a bivariate 2-state Markov switching model for the short-rate changes and the yield curve slope. The two states are characterized by the variance of the shortrate changes: Low and high variance. In the high variance regime the yield curve becomes steeper with the interest-rate variance, in the low variance regime the slope is independent hereof. A non-switching specification amounts to averaging across the two states. The economy is in the high variance state during unusual economic periods.

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  • Christiansen, Charlotte, 2002. "Regime Switching in the Yield Curve," Finance Working Papers 02-13, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    • Handle: RePEc:hhb:aarfin:2002_013
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    Cited by:

    1. Hideyuki Takamizawa, 2015. "Predicting Interest Rate Volatility Using Information on the Yield Curve," International Review of Finance, International Review of Finance Ltd., vol. 15(3), pages 347-386, September.
    2. Emmanuel Hache & Frédéric Lantz, 2011. "Oil price volatility: An Econometric Analysis of the WTI Market," Working Papers hal-02472326, HAL.
    3. Christiansen, Charlotte, 2008. "Level-ARCH short rate models with regime switching: Bivariate modeling of US and European short rates," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 925-948, December.
    4. Monfort, A. & Pegoraro, F., 2007. "Switching VARMA Term Structure Models - Extended Version," Working papers 191, Banque de France.
    5. Daniel R. Smith & Christophe Parignon, 2004. "Modeling Yield-Factor Volatility," Econometric Society 2004 Australasian Meetings 307, Econometric Society.

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    Keywords

    Interest-rate variance; Regime switching; SWARCH; Yield curve; Yield curve slope;
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