An Empirical Examination of Term Structure Models with Regime Shifts

Turalay Kenc, Edward Driffill () and Martin Sola

No 119, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: We examine several continuous-time term structure models in which the short rate is subject both to continuous changes and to discrete shifts. Several regime-switching term structure models are developed, with regime-dependence in various combinations of their drift and diffusion parameters. We examine their predictive power. Our empirical analysis suggests that it is important to attempt to specify the switching model correctly: badly parameterized switching models may not be an improvement (in terms of pricing) over models which do not allow for regime switching, even when there are clear breaks in the data.

Keywords: term structure of interest rates; bond yields; stochastic discount factor/pricing kernel; regime switching (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Date: 2003-06-04
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (4)

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Working Paper: An Empirical Examination of Term Structure Models with Regime Shifts (2003)
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