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Title: The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates

Author(s): Richard Clarida, Lucio Sarno, Mark P Taylor and Giorgio Valente

Publication Date: January 2005

Keyword(s): forecasting, markov switching and term structure of interest rates

Programme Area(s): International Macroeconomics

Abstract: We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties.

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Bibliographic Reference

Clarida, R, Sarno, L, Taylor, M and Valente, G. 2005. 'The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4835