Term Structure of Interest Rates with Regime Shifts

Journal of Finance - Tập 57 Số 5 - Trang 1997-2043 - 2002
Ravi Bansal1, Hao Zhou2
1Fuqua School of Business at Duke University
2Federal Reserve Board in Washington, DC

Tóm tắt

ABSTRACTWe develop a term structure model where the short interest rate and the market price of risks are subject to discrete regime shifts. Empirical evidence from efficient method of moments estimation provides considerable support for the regime shifts model. Standard models, which include affine specifications with up to three factors, are sharply rejected in the data. Our diagnostics show that only the regime shifts model can account for the well‐documented violations of the expectations hypothesis, the observed conditional volatility, and the conditional correlation across yields. We find that regimes are intimately related to business cycles.

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