Regime Switches in Interest Rates

70 Pages Posted: 1 Jun 1998

See all articles by Geert Bekaert

Geert Bekaert

Columbia University - Columbia Business School, Finance

Andrew Ang

BlackRock, Inc

Multiple version iconThere are 2 versions of this paper

Date Written: March 25, 1998


This paper examines the econometric performance of regime switching models for interest rate data from the US, Germany and the UK. There is strong evidence supporting the presence of regime switches but univariate models are unlikely to yield consistent estimates of the model parameters. Regime-switching models incorporating international short rate and term spread information forecast better, match sample moments better, and classify regimes better than univariate models. We show that the regimes in interest rates correspond reasonably well with business cycles, at least in the US. This may explain why regime-switching models forecast interest rates better than single regime models. Finally, the non-linear interest rate dynamics implied by regime switching models have potentially important implications for the macro-economic literature documenting the effects of monetary policy shocks on economic aggregates. Moreover, the implied volatility and drift functions are rich enough to resemble those recently estimated using non-parametric techniques.

JEL Classification: C32, C53, E32, E44, G12

Suggested Citation

Bekaert, Geert and Ang, Andrew, Regime Switches in Interest Rates (March 25, 1998). Available at SSRN: or

Geert Bekaert

Columbia University - Columbia Business School, Finance ( email )

United States

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

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