The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates

45 Pages Posted: 26 Apr 2005

See all articles by Richard Clarida

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR)

Giorgio Valente

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Date Written: January 2005

Abstract

We examine the relationship between interest rates of different maturities for the US, Germany and Japan over the period 1982-2000, using a general, multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts. This approach has a very general underlying theoretical rationale that allows for time-varying term premia and other short-run deviations from the expectations model of the term structure. The resulting non-linear models provide good in-sample fits, display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out-of-sample forecasting properties.

Keywords: Term structure of interest rates, markov switching, forecasting

JEL Classification: E43, E47

Suggested Citation

Clarida, Richard H. and Sarno, Lucio and Taylor, Mark Peter and Valente, Giorgio, The Role of Asymmetries and Regime Shifts in the Term Structure of Interest Rates (January 2005). CEPR Discussion Paper No. 4835. Available at SSRN: https://ssrn.com/abstract=709148

Richard H. Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco ( email )

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National Bureau of Economic Research (NBER)

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Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

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London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Mark Peter Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Giorgio Valente

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

3 Garden Road, 8th Floor
Hong Kong
China

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