A dynamic Nelson-Siegel yield curve model with Markov switching
Jared Levant and
Economic Modelling, 2017, vol. 67, issue C, 73-87
This paper proposes a model to better capture persistent regime changes in the interest rates of the US term structure. While the previous literature on this matter proposes that regime changes in the term structure are due to persistent changes in the conditional mean and volatility of interest rates we find that changes in a single parameter that determines the factor loadings of the model better captures regime changes. We show that this model gives superior in-sample forecasting performance as compared to a baseline model and a volatility-switching model. In general, we find compelling evidence that the extracted factors from our term structure models are closely related with various economic variables. Furthermore, we investigate and find evidence that the effects of macroeconomic phenomena such as monetary policy, inflation expectations, and real economic activity differ according to the particular regime realized for the term structure. In particular, we identify the periods where monetary policy appears to have a greater effect on the yield curve, and the periods where inflation expectations seem to have a greater effect in yield determination. We also find convincing evidence of a relationship between the regimes estimated by the various switching models with economic activity and monetary policy.
Keywords: C51; E43; Nelson–Siegel yield curve model; Regime shifts; State-Space model; Kalman filter; Kim algorithm (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:67:y:2017:i:c:p:73-87
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().