A GENERAL EQUILIBRIUM MODEL OF THE TERM STRUCTURE OF INTEREST RATES UNDER REGIME-SWITCHING RISK

Shu Wu and Yong Zeng ()
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Yong Zeng: Department of Mathematics and Statistics at University of Missouri at Kansas City, Kansas City, MO 64110, USA

International Journal of Theoretical and Applied Finance (IJTAF), 2005, vol. 08, issue 07, 839-869

Abstract: This paper develops a general equilibrium model of the term structure of interest rates in the presence of the systematic risk of regime shifts. The model elucidates the economic nature of the regime-shift risk premium and introduces a new source of time-variation in bond returns. A closed-form solution for the term structure of interest rates is obtained under an affine model using log-linear approximation. The model is estimated by Efficient Method of Moments. The regime-switching risk is found to be statistically significant and mostly affect the long-end of the yield curve.

Keywords: Term structure; general equilibrium; Markov regime shifts (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (13)

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Working Paper: A General Equilibrium Model of the Term Structure of Interest Rates under Regime-switching Risk (2004)
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DOI: 10.1142/S0219024905003323

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