Monetary Policy Regimes: Implications for the Yield Curve and Bond Pricing

58 Pages Posted: 14 Mar 2013 Last revised: 8 Oct 2013

See all articles by Kameliya Filipova

Kameliya Filipova

University of St. Gallen

Francesco Audrino

University of St. Gallen; Swiss Finance Institute

Enrico G. De Giorgi

University of St. Gallen - SEPS: Economics and Political Sciences; Swiss Finance Institute

Date Written: October 7, 2013

Abstract

We develop a multivariate dynamic term structure model, which takes into account the nonlinear (time-varying) relationship between interest rates and the state of the economy. In contrast to the classical term structure literature, where nonlinearities are captured by increasing the number of latent state variables, or by latent regime shifts, in our no-arbitrage framework the regimes are governed by thresholds and are directly linked to economic fundamentals. Specifically, starting from a simple monetary policy model for the short rate, we introduce a parsimonious and tractable model for the yield curve, which takes into account the possibility of regime shifts in the behavior of the Federal Reserve. In our empirical analysis, we show the merit of our approach along the following dimensions: (i) interpretable bond dynamics; (ii) accurate short end yield curve pricing; (iii) yield curve implications.

Keywords: Threshold regime switching model; Macroeconomic variables; Term structure of interest rates; Asset pricing; Nonlinear dynamics; Business cycles.

JEL Classification: C32, C51, C52, C53, E43, G12

Suggested Citation

Filipova, Kameliya and Audrino, Francesco and De Giorgi, Enrico G., Monetary Policy Regimes: Implications for the Yield Curve and Bond Pricing (October 7, 2013). Available at SSRN: https://ssrn.com/abstract=2232742 or http://dx.doi.org/10.2139/ssrn.2232742

Kameliya Filipova

University of St. Gallen ( email )

Institute of Mathematics and Statistics
Bodanstrasse 6
St. Gallen, St. Gallen CH-9000
Switzerland

Francesco Audrino

University of St. Gallen ( email )

Bodanstrasse 6
St. Gallen, CH-9000
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Enrico G. De Giorgi (Contact Author)

University of St. Gallen - SEPS: Economics and Political Sciences ( email )

Department of Economics
Bodanstrasse 6
CH-9000 St. Gallen
Switzerland
+41712242430 (Phone)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
523
Abstract Views
2,309
Rank
98,604
PlumX Metrics