Keywords: Regime switching, term structure of interest rate, reprojection, efficient method of moments
Abstract: We develop a term structure model where the short interest rate and the
market price of risks are subject to discrete regime shifts. Empirical
evidence from Efficient Method of Moments estimation provides considerable
support for the regime shifts model. Standard models, which include affine
specifications with up to three factors, are sharply rejected in the data.
Our diagnostics show that only the regime shifts model can account for the
well documented violations of the expectations hypothesis, the observed
conditional volatility, and the conditional correlation across yields.
We find that regimes are intimately related to business cycles.
Full paper (730 KB PDF)
Home | FEDS | List of 2001 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: November 30, 2001