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http://ssrn.com/abstract=226250
 
 

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Regime Switches in Interest Rates


Geert Bekaert


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Andrew Ang


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

April 1998

NBER Working Paper No. w6508

Abstract:     
Regime-switching models are well suited to capture the non-linearities in interest rates. This paper examines the econometric performance of regime-switching models for interest rate data from the US, Germany and the UK. There is strong evidence supporting the presence of regime switches but univariate models are unlikely to yield consistent estimates of the model parameters. Regime-switching models incorporating international short rate and term spread information forecast better, match sample moments better, and classify regimes better than univariate models. We show that the regimes in interest rates correspond reasonably well with business cycles, at least in the US. This may explain why regime-switching models forecast interest rates better than single regime models. Finally, the non-linear interest rate dynamics implied by regime-switching models have potentially important implications for the macroeconomic literature documenting the effects of monetary policy shocks on economic aggregates. Moreover, the implied volatility and drift functions are rich enough to resemble those recently estimated using non-parametric techniques.

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Date posted: July 12, 2000  

Suggested Citation

Bekaert, Geert and Ang, Andrew, Regime Switches in Interest Rates (April 1998). NBER Working Paper No. w6508. Available at SSRN: http://ssrn.com/abstract=226250

Contact Information

Geert Bekaert
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Andrew Ang (Contact Author)
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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