Cointegration and Regime-Switching Risk Premia in the US Term Structure of Interest Rates

Peter Tillmann

No 26, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: To date the cointegrating properties and the regime-switching behavior of the term structure are two separate strands of the literature. This paper integrates these lines of research and introduces regime shifts into a cointegrated VAR model. We argue that the short-run dynamics of the cointegrated model are likely to shift across regimes while the equilibrium relation implied by the expectations hypothesis of the term structure is robust to regime shifts. A Markov-switching VECM approach for U.S. data outperforms a linear VECM. We find significant shifts in risk premia and interest rate volatility. These regime shifts reflect changing inflation expectations and shifts in monetary policy, respectively

Keywords: term structure; expectations hypothesis; cointegration; Markov-switching; monetary policy (search for similar items in EconPapers)
JEL-codes: E43 E52 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:26

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