Is There a Structural Break in the Risk Free Interest Rate Dynamics?
13 Pages Posted: 23 Mar 2006 Last revised: 14 Feb 2008
Date Written: February 5, 2008
I use the endogenous structural breakpoint tests to search for a structural change in the risk free interest rate dynamics based on the model proposed by Chan, Karolyi, Longstaff and Sanders (1992) (hereafter CKLS). Monte Carlo experiments show that a reliance of the asymptotic distribution leads to a size distortion in finite sample, but bootstrapping can reduce the size distortion. My results indicate a mild evidence of a structural break in the risk free rate which coincides with the monetary policy change in the early 1980s and after that the volatility of risk free rate dropped dramatically.
Keywords: endogenous structural breakpoint test, CKLS model, GMM, bootstrap
JEL Classification: C12, C15, E43, G12
Suggested Citation: Suggested Citation