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Monetary policy regimes: implications for the yield curve and bond pricing
Journal
Journal of Financial Economics
ISSN
0304-405X
ISSN-Digital
1879-2774
Type
journal article
Date Issued
2014-09-01
Author(s)
Abstract
We develop a multivariate dynamic term structure model, which takes into account the nonlinear (time-varying) relationship between interest rates and the state of the economy. In contrast to the classical term structure literature, where nonlinearities are captured by increasing the number of latent state variables, or by latent regime shifts, in our no-�arbitrage framework the regimes are governed by thresholds and are directly linked to economic fundamentals. Specifically, starting from a simple monetary policy model for the short rate, we introduce a parsimonious and tractable model for the yield curve, which takes into account the possibility of regime shifts in the behavior of the Federal Reserve. In our empirical analysis, we show the merit of our approach along the following dimensions: (i) interpretable bond dynamics; (ii) accurate short end yield curve pricing; (iii) yield curve implications.
Language
English
Keywords
Threshold regime switching model
Macroeconomic variables
Term structure of interest rates
Asset pricing
Nonlinear dynamics
Business cycles
HSG Classification
contribution to scientific community
HSG Profile Area
SEPS - Quantitative Economic Methods
Refereed
Yes
Publisher
Elsevier
Publisher place
Amsterdam
Volume
3
Number
113
Start page
427
End page
454
Pages
28
Subject(s)
Eprints ID
227393