TY  - JOUR
AU  - Ang,Andrew
AU  - Bekaert,Geert
TI  - Regime Switches in Interest Rates
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6508
PY  - 1998
Y2  - April 1998
UR  - http://www.nber.org/papers/w6508
L1  - http://www.nber.org/papers/w6508.pdf
N1  - Author contact info:
Andrew Ang
Columbia Business School
3022 Broadway 413 Uris
New York, NY 10027
Tel: 212/854-9154
Fax: 212/662-8474
E-Mail: aa610@columbia.edu

Geert Bekaert
Graduate School of Business
Columbia University
3022 Broadway, 411 Uris Hall
New York, NY 10027
Tel: 212/854-9156
Fax: 212/662-8474
E-Mail: gb241@columbia.edu
AB  - 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.
ER  -