Short Rate Nonlinearities and Regime Switches

37 Pages Posted: 8 Dec 2000  

Geert Bekaert

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

Andrew Ang

BlackRock, Inc

Date Written: October 23, 2000

Abstract

Using non-parametric estimation methods, various authors have shown distinct non-linearities in the drift and volatility function of the US short rate, which are inconsistent with standard affine term structure models. We document how a regime-switching model with state dependent transition probabilities between regimes can replicate the patterns found by the non-parametric studies. To do so, we use data from the UK and Germany in addition to US data and include term spreads in some of our models. We also examine the drift and volatility function of the term spread.

Keywords: Short rate, term spread, drift, volatility, regime-switching

JEL Classification: C22, C32, E43, G12

Suggested Citation

Bekaert, Geert and Ang, Andrew, Short Rate Nonlinearities and Regime Switches (October 23, 2000). Available at SSRN: https://ssrn.com/abstract=247207 or http://dx.doi.org/10.2139/ssrn.247207

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)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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