A General Equilibrium Model of the Term Structure of Interest Rates under Regime-switching Risk

Yong Zeng and Shu Wu

No 304, Econometric Society 2004 North American Summer Meetings from Econometric Society

Abstract: This paper incorporates the systematic risk of regime shifts into a general equilibrium model of the term structure of interest rates. The model shows that there is a new source of time-variation in bond term premiums in the presence of regime shifts. This new component is a regime-switching risk premium that depends on the covariations between discreet changes in marginal utility and bond prices across different regimes. 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: The Term Structure; General Equilibrium; Markov Regime Shifts (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ecm:nasm04:304

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