NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Regime Switches in Interest Rates

Andrew Ang, Geert Bekaert

NBER Working Paper No. 6508
Issued in April 1998
NBER Program(s):   AP

Regime-switching models are well suited to capture the non-linearities in interest rates. 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 macroeconomic 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.

download in pdf format
   (2918 K)

email paper

This paper is available as PDF (2918 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w6508

Published: Ang, Andrew and Geert Bekaert. "Regime Switches In Interest Rates," Journal of Business and Economic Statistics, 2002, v20(2,Apr), 163-182. citation courtesy of

Users who downloaded this paper also downloaded these:
Ang and Timmermann w17182 Regime Changes and Financial Markets
Ang and Bekaert w10080 How do Regimes Affect Asset Allocation?
Benhabib w14770 A Note on Regime Switching, Monetary Policy, and Multiple Equilibria
Engel w4210 Can the Markov Switching Model Forecast Exchange Rates?
Clarida, Sarno, Taylor, and Valente w8601 The Out-of-Sample Success of Term Structure Models as Exchange Rate Predictors: A Step Beyond
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us