Are Analysts Right? Macroeconomic Factors and Regime Switching in the Term Structure of Interest Rates
Federal Reserve Bank of New York
February 15, 2008
AFA 2009 San Francisco Meetings Paper
The validity of analysts' beliefs that the dependence of bond prices on crude oil prices changes sign over time and that the overall economy performance is correlated with the slope of the yield curve is examined. These beliefs are mapped into the term structure of interest rates framework by allowing for regime switching in the term structure and by using crude oil prices and an overall economy performance index (CFNAI) as factors. Fitting is done using Gibbs sampling, which allows for fewer assumptions on the regime switching parameters than classical methods and, thus, provides a more flexible model. The predicted yields are calculated using the eigenfunction expansion method.
Number of Pages in PDF File: 43
Keywords: Quadratic Term Structure Models, regime switching, inflation rates, oil prices, Gibbs sampling, eigenfunction expansion
JEL Classification: G12, C11, C63, Q49
Date posted: March 19, 2008 ; Last revised: March 14, 2010
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