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Discussion Paper Details

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Title: On Model Selection and Markov Switching: A Empirical Examination of Term Structure Models with Regime Shifts

Author(s): John Driffill, Turalay Kenc, Martin Sola and Fabio Spagnolo

Publication Date: January 2004

Keyword(s): bond yields, regime switching, stochastic discount factor/pricing kernel and term structure of interest rates

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: We examine several continuous-time term-structure models, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that inquiring which parameters of the short-term interest rate equation are allowed to switch is crucial, as failing to do so may result in switching pricing models that produce no improvement (in terms of pricing) with respect to models which do not allow for regime switching, even when there are clear breaks in the data.

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Bibliographic Reference

Driffill, J, Kenc, T, Sola, M and Spagnolo, F. 2004. 'On Model Selection and Markov Switching: A Empirical Examination of Term Structure Models with Regime Shifts'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4165