Articlegreen2002

Term Structure of Interest Rates with Regime Shifts

456 citations0/0 files storedThe Journal of Finance

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Stochastic processes and financial applications Monetary Policy and Economic Impact Financial Markets and Investment Strategies

Abstract

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.

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References

1989A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle 1985A Theory of the Term Structure of Interest Rates 1977An equilibrium characterization of the term structure 2012The Econometrics of Financial Markets 1978Asset Prices in an Exchange Economy 1997The Econometrics of Financial Markets 1989Business conditions and expected returns on stocks and bonds 1996A YIELD‐FACTOR MODEL OF INTEREST RATES

Cited by

2012Regime Changes and Financial Markets 2010Affine Term Structure Models 2003Term Structure Dynamics in Theory and Reality 2007Regime Shifts in a Dynamic Term Structure Model of U.S. Treasury Bond Yields 2005Inflation risk premia and the expectations hypothesis 2013What Ties Return Volatilities to Price Valuations and Fundamentals?2017Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds

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