Beta Regimes for the Yield Curve
Posted: 16 Jun 2008
There are 2 versions of this paper
Date Written: Summer 2007
Abstract
We propose an affine term structure model which accommodates nonlinearities in the drift and volatility function of the short-term interest rate. Such nonlinearities are a consequence of discrete beta-distributed regime shifts constructed on multiple thresholds. We derive iterative closed-form formula for the whole yield curve dynamics that can be estimated using a linearized Kalman filter. Fitting the model on US data, we collect empirical evidence of its potential in estimating conditional volatility and correlation across yields.
Keywords: affine model, linearized Kalman filter, term structure of interest rate, threshold regime switching model
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