An Empirical Examination of Term Structure Models with Regime Shifts

33 Pages Posted: 12 Jun 2003

See all articles by John Driffill

John Driffill

University of London - Birkbeck College; Centre for Economic Policy Research (CEPR)

Turalay Kenc

University of London - Imperial College

Martín Sola

Universidad Torcuato Di Tella; University of London - Economics, Mathematics and Statistics

Date Written: January 27, 2003

Abstract

We examine several continuous-time term structure models in which the short rate is subject both to continuous changes and to discrete shifts. Several regime-switching term structure models are developed, with regime-dependence in various combinations of their drift and diffusion parameters. We examine their predictive power. Our empirical analysis suggests that it is important to attempt to specify the switching model correctly: Badly parameterized switching models may not be an improvement (in terms of pricing) over models which do not allow for regime switching, even when there are clear breaks in the data.

Suggested Citation

Driffill, John and Kenc, Turalay and Sola, Martín, An Empirical Examination of Term Structure Models with Regime Shifts (January 27, 2003). EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=393481 or http://dx.doi.org/10.2139/ssrn.393481

John Driffill (Contact Author)

University of London - Birkbeck College ( email )

London, WC1E 7HX
United Kingdom
+44 20 7631 6417 (Phone)
+44 20 7631 6416 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Turalay Kenc

University of London - Imperial College ( email )

Exhibition Road
London SW7 2AZ
United Kingdom
+44 20 7594 9212 (Phone)
+44 20 7823 7685 (Fax)

Martín Sola

Universidad Torcuato Di Tella ( email )

Minones 2159
1428 Buenos Aires, 1428
Argentina
5411 4784 0080 (Phone)
5411 4784 9807 (Fax)

University of London - Economics, Mathematics and Statistics ( email )

Malet Street
London, WC1E 7HX
United Kingdom
+44 20 7631 6411 (Phone)
+44 20 7631 6416 (Fax)

HOME PAGE: http://www.econ.bbk.ac.uk/faculty/sola/

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