Threshold Dynamics of Short‐term Interest Rates: Empirical Evidence and Implications for the Term Structure

Theofanis Archontakis and Wolfgang Lemke

Economic Notes, 2008, vol. 37, issue 1, 75-117

Abstract: This paper studies a nonlinear one‐factor term structure model in discrete time. The short‐term interest rate follows a self‐exciting threshold autoregressive (SETAR) process that allows for shifts in the intercept and the variance. In comparison with a linear model, we find empirical evidence in favour of the threshold model for Germany and the US. Based on the estimated short‐rate dynamics we derive the implied arbitrage‐free term structure of interest rates. Since analytical solutions are not feasible, bond prices are computed by means of Monte Carlo integration. The resulting term structure captures stylized facts of the data. In particular, it implies a nonlinear relation between long rates and the short rate.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/j.1468-0300.2008.00189.x

Related works:
Working Paper: Threshold dynmamics of short-term interest rates: empirical evidence and implications for the term structure (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:ecnote:v:37:y:2008:i:1:p:75-117

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0391-5026

Access Statistics for this article

More articles in Economic Notes from Banca Monte dei Paschi di Siena SpA
Bibliographic data for series maintained by Wiley Content Delivery ().