On Model Selection and Markov Switching: A Empirical Examination of Term Structure Models with Regime Shifts

Edward Driffill (), Martin Sola, Turalay Kenc and Fabio Spagnolo

No 4165, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine several continuous-time term-structure models, in which the short rate is subject to discrete shifts. Our empirical analysis suggests that inquiring which parameters of the short-term interest rate equation are allowed to switch is crucial, as failing to do so may result in switching pricing models that produce no improvement (in terms of pricing) with respect to models which do not allow for regime switching, even when there are clear breaks in the data.

Keywords: Term structure of interest rates; Bond yields; Stochastic discount factor/pricing kernel; Regime switching (search for similar items in EconPapers)
JEL-codes: E43 G12 (search for similar items in EconPapers)
Date: 2004-01
New Economics Papers: this item is included in nep-ets, nep-mac and nep-rmg
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Citations: View citations in EconPapers (2)

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Working Paper: On Model Selection and Markov-Switching: An Empirical Examination of Term Structure Models with Regime Shifts (2008)
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