Term Structure of Interest Rates with Regime Shifts

Posted: 5 Aug 2004

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Hao Zhou

Tsinghua University - PBC School of Finance

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Abstract

We develop a term structure model where the short interest rate and the market price of risks are subject to discrete regime shifts. Empirical evidence from Efficient Method of Moments estimation provides considerable support for the regime shifts model. Standard models, which include affine specifications with up to three factors, are sharply rejected in the data. Our diagnostics show that only the regime shifts model can account for the well documented violations of the expectations hypothesis, the observed conditional volatility, and the conditional correlation across yields. We find that regimes are intimately related to business cycles.

JEL Classification: E43, G12, C51, C52

Suggested Citation

Bansal, Ravi and Zhou, Hao, Term Structure of Interest Rates with Regime Shifts. Available at SSRN: https://ssrn.com/abstract=572573

Ravi Bansal

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Hao Zhou (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengfu Road
Haidian District
Beijing, 100083
China
86-10-62790655 (Phone)

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