The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates
45 Pages Posted: 26 Apr 2005
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: Suggested Citation
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