DP4835 The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates

Author(s): Richard Clarida, Lucio Sarno, Mark Taylor, Giorgio Valente
Publication Date: January 2005
Keyword(s): forecasting, markov switching, term structure of interest rates
JEL(s): E43, E47
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4835

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.