On Model Selection and Markov-Switching: An Empirical Examination of Term Structure Models with Regime Shifts

Edward Driffill (), Turalay Kenc, Martin Sola and Fabio Spagnolo

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: We examine several discrete-time term-structure models, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that inquiring which parameters of the short-term interest rate equation are allowed to switch is crucial. Failing to do so may result in switching pricing models that produce no improvement (in terms of pricing) with respect to 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; and regime switching. (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2008-04
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Related works:
Working Paper: On Model Selection and Markov Switching: A Empirical Examination of Term Structure Models with Regime Shifts (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:udt:wpecon:2008-04

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