Beta Regimes for the Yield Curve
34 Pages Posted: 20 May 2005
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Beta Regimes for the Yield Curve
Beta Regimes for the Yield Curve
Date Written: May 18, 2005
Abstract
We propose an affine term structure model which accommodates non-linearities in the drift and volatility function of the short-term interest rate. Such non-linearities 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: Threshold Regime Switching Model, Affine Model, Term Structure of Interest Rate, Linearized Kalman Filter.
JEL Classification: E43, G12, C51, C52
Suggested Citation: Suggested Citation
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