Term structure of interest rates with regime shifts

Published

Journal Article

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.

Full Text

Duke Authors

Cited Authors

  • Bansal, R; Zhou, H

Published Date

  • January 1, 2002

Published In

Volume / Issue

  • 57 / 5

Start / End Page

  • 1997 - 2043

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/0022-1082.00487

Citation Source

  • Scopus