On Model Selection and Markov Switching: An Empirical Examination of Term Structure Models with Regime Shifts

38 Pages Posted: 19 Jan 2004

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

Fabio Spagnolo

Brunel University London - Economics and Finance

Date Written: January 2004

Abstract

We examine several continuous-time term-structure models, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that inquiring which parameters of the short-term interest rate equation are allowed to switch is crucial, as failing to do so may result in switching pricing models that produce no improvement (in terms of pricing) with respect to models which do not allow for regime switching, even when there are clear breaks in the data.

JEL Classification: E43, G12

Suggested Citation

Driffill, John and Kenc, Turalay and Sola, Martín and Spagnolo, Fabio, On Model Selection and Markov Switching: An Empirical Examination of Term Structure Models with Regime Shifts (January 2004). CEPR Discussion Paper No. 4165. Available at SSRN: https://ssrn.com/abstract=488984

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/

Fabio Spagnolo

Brunel University London - Economics and Finance ( email )

Uxbridge UB8 3PH
United Kingdom
+44 1895 816383 (Phone)
+44 1895 203303 (Fax)

HOME PAGE: http://www.brunel.ac.uk/depts/ecf/Staff/SpagnoloF/Main.htm

Register to save articles to
your library

Register

Paper statistics

Downloads
28
Abstract Views
1,462
PlumX Metrics