Is There a Structural Break in the Risk Free Interest Rate Dynamics?

Jun Ma

No UWEC-2006-12, Working Papers from University of Washington, Department of Economics

Abstract: In this paper, I use the endogenous structural breakpoint tests to empirically search for a potential structural change in the dynamics of risk free interest rate based on the CKLS model (Chan et al. (1992)). To provide a better finite sample performance of this type of test, I bootstrap the critical values. My results indicate a mild evidence of a structural break during the period of monetary policy change in the 1980s. After this change the volatility of risk free interest rate seems to drop dramatically. Two Monte Carlo experiments are presented to show that bootstrapped critical values reduce the size distortion of asymptotic ones.

Date: 2005-07
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