Regime Switching in the Yield Curve

27 Pages Posted: 24 Feb 2002

Date Written: February 2002

Abstract

The paper investigates the effect of interest rate variance on the shape of the yield curve using a bivariate 2-state Markov switching model for the short rate changes and the yield curve slope. The two states are characterized by the variance of the short rate changes: Low and high variance. In the high variance regime the yield curve becomes steeper with the interest rate variance, in the low variance regime the slope is independent hereof. The two variables are more strongly correlated in the high variance state. A non-switching specification amounts to averaging across the two states.

Keywords: Interest rate variance, Regime switching, SWARCH, Yield curve, Yield curve slope

JEL Classification: G12, C32

Suggested Citation

Christiansen, Charlotte, Regime Switching in the Yield Curve (February 2002). Available at SSRN: https://ssrn.com/abstract=301510 or http://dx.doi.org/10.2139/ssrn.301510

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

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