Are Analysts Right? Macroeconomic Factors and Regime Switching in the Term Structure of Interest Rates

43 Pages Posted: 19 Mar 2008 Last revised: 14 Mar 2010

Nina Boyarchenko

Federal Reserve Bank of New York

Date Written: February 15, 2008

Abstract

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.

Keywords: Quadratic Term Structure Models, regime switching, inflation rates, oil prices, Gibbs sampling, eigenfunction expansion

JEL Classification: G12, C11, C63, Q49

Suggested Citation

Boyarchenko, Nina, Are Analysts Right? Macroeconomic Factors and Regime Switching in the Term Structure of Interest Rates (February 15, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1094080 or http://dx.doi.org/10.2139/ssrn.1094080

Nina Boyarchenko (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-7339 (Phone)
212-720-1582 (Fax)

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