The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates

45 Pages Posted: 26 Apr 2005

See all articles by Richard Clarida

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Lucio Sarno

University of Cambridge - Judge Business School; Centre for Economic Policy Research (CEPR)

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR); Brookings Institution

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Date Written: January 2005

Abstract

We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties.

Keywords: Term structure of interest rates, markov switching, forecasting

JEL Classification: E43, E47

Suggested Citation

Clarida, Richard H. and Sarno, Lucio and Taylor, Mark P. and Valente, Giorgio, The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates (January 2005). Available at SSRN: https://ssrn.com/abstract=709148

Richard H. Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco ( email )

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National Bureau of Economic Research (NBER)

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Lucio Sarno (Contact Author)

University of Cambridge - Judge Business School ( email )

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Centre for Economic Policy Research (CEPR)

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United Kingdom

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

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St. Louis, MO 63130-4899
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Centre for Economic Policy Research (CEPR)

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United Kingdom

Brookings Institution ( email )

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Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

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Hong Kong
China

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