Change-Points in Affine Arbitrage-Free Term Structure Models

Siddhartha Chib and Kyu Ho Kang

Journal of Financial Econometrics, 2013, vol. 11, issue 2, 302-334

Abstract: In this paper, we investigate the timing of structural changes in yield curve dynamics in the context of an arbitrage-free, one latent and two macroeconomic factors, affine term structure model. We suppose that all parameters in the model are subject to changes at unknown time points. We fit a number of models to the U.S. term structure data and find support for three change-points. We also find that the term structure and the risk premium are materially different across regimes and that the out-of-sample forecasts of the term structure improve from incorporating regime changes. Copyright The Author 2012. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2013
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