DP4835 The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates
|Author(s):||Richard Clarida, Lucio Sarno, Mark P Taylor, Giorgio Valente|
|Publication Date:||January 2005|
|Keyword(s):||forecasting, markov switching, term structure of interest rates|
|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.