Beta Regimes for the Yield Curve

Francesco Audrino and Enrico De Giorgi ()

Journal of Financial Econometrics, vol. 5, issue 3, 456-490

Abstract: We propose an affine term structure model which accommodates nonlinearities in the drift and volatility function of the short-term interest rate. Such nonlinearities are a consequence of discrete beta-distributed regime shifts constructed on multiple thresholds. We derive iterative closed-form formula for the whole yield curve dynamics that can be estimated using a linearized Kalman filter. Fitting the model on US data, we collect empirical evidence of its potential in estimating conditional volatility and correlation across yields. Copyright , Oxford University Press.

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