Flexible Threshold Models for Modelling Interest Rate Volatility

Petros Dellaportas, David G. T. Denison and Chris Holmes

Econometric Reviews, 2007, vol. 26, issue 2-4, 419-437

Abstract: This paper focuses on interest rate models with regime switching and extends previous nonlinear threshold models by relaxing the assumption of a fixed number of regimes. Instead we suggest automatic model determination through Bayesian inference via the reversible jump Markov Chain Monte Carlo (MCMC) algorithm. Moreover, we allow the thresholds in the volatility to be driven not only by the interest rate but also by other economic factors. We illustrate our methodology by applying it to interest rates and other economic factors of the American economy.

Keywords: Interest rates; Markov Chain Monte Carlo; Reversible jump; Threshold model (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1080/07474930701220600

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