Stochastic Threshold Models on Interest Rate

Huirong Li and Jian Yang
Additional contact information
Huirong Li: The University of Western Ontario, https://economics.uwo.ca/
Jian Yang: The University of Western Ontario, https://economics.uwo.ca/
Authors registered in the RePEc Author Service: Jeffrey Andrew Smith and Mark C. Berger

No 9913, University of Western Ontario, Departmental Research Report Series from University of Western Ontario, Department of Economics

Abstract: Threshold models have been found useful in modeling nonlinearities in many financial time series. In this framework, the financial variable of interest evolves according to different dynamics, which is solely determined by the threshold regimes that the observed indicator variable falls into. This paper generalizes the threshold models to a class of stochastic threshold models, which allow for stochastic dependence of the current economic state on the threshold regimes. In a stochastic threshold model, different economic states are possible to occur within a certain threshold regime and each state occurs with some probability depend on the threshold regime and other recently observed information. Model identification and maximum likelihood estimation are developed. An study of short-term interest rate is conducted. We find that the short-term interest rate behaves asymmetrically in a rising versus a declining market. Declining market has significantly negative duration (in "return clock") dependence and rising market has insignificantly positive duration dependence. In the comparison of generalized autoregressive conditional heteroskedastisity models, threshold autoregressive models, generalized regime-switching models and stochastic threshold models, we find that our stochastic threshold model fits the data best in terms of alternative model selection criteria and in-sample forecasting. It also provides the best out-of-sample forecasting.

Keywords: Stochastic Threshold; Short-term interest rate; Conditional volatility; Maximum likelihood (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-lab
References: Add references at CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://ir.lib.uwo.ca/cgi/viewcontent.cgi?article=1340&context=economicsresrpt (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:uwo:uwowop:9913

Ordering information: This working paper can be ordered from
https://economics.uw ... itting_ordering.html
The price is Paper copy available by mail at a cost of $10.00 Canadian each.

Access Statistics for this paper

More papers in University of Western Ontario, Departmental Research Report Series from University of Western Ontario, Department of Economics Department of Economics, Social Science Centre, University of Western Ontario, London, Ontario, Canada N6A 5C2.
Bibliographic data for series maintained by ().