Monetary policy regimes: Implications for the yield curve and bond pricing

Kameliya Filipova, Francesco Audrino and Enrico De Giorgi ()

Journal of Financial Economics, 2014, vol. 113, issue 3, 427-454

Abstract: We develop a multivariate dynamic term structure model, which takes into account the nonlinear (time-varying) relation between interest rates and the state of the economy. In contrast to the classical term structure literature, in which nonlinearities are captured by increasing the number of latent state variables or by latent regime shifts, in our no-arbitrage framework the regimes are governed by thresholds and are directly linked to economic fundamentals. Specifically, starting from a simple monetary policy model for the short rate, we introduce a parsimonious and tractable model for the yield curve, which takes into account the possibility of regime shifts in the behavior of the Federal Reserve. In our empirical analysis, we show the merit of our approach three dimensions: interpretable bond dynamics, accurate short end yield curve pricing, and yield curve implications.

Keywords: Threshold regime switching model; Macroeconomic variables; Term structure of interest rates; Asset pricing; Nonlinear dynamics; Business cycles (search for similar items in EconPapers)
JEL-codes: C32 C51 C52 C53 E43 G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X1400110X
Full text for ScienceDirect subscribers only

Related works:
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:eee:jfinec:v:113:y:2014:i:3:p:427-454

DOI: 10.1016/j.jfineco.2014.05.006

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().