A General Equilibrium Model of the Term Structure of Interest Rates under Regime-switching Risk
This paper incorporates the systematic risk of regime shifts into a general equilibrium model of the term structure of interest rates. The model shows that there is a new source of time-variation in bond term premiums in the presence of regime shifts. This new component is a regime-switching risk premium that depends on the covariations between discreet changes in marginal utility and bond prices across different regimes. A closed-form solution for the term structure of interest rates is obtained under an affine model using log-linear approximation. The model is estimated by Efficient Method of Moments. The regime-switching risk is found to be statistically significant and mostly affect the long-end of the yield curve
Year of publication: |
2004-08-11
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Authors: | Zeng, Yong ; Wu, Shu |
Institutions: | Econometric Society |
Subject: | The Term Structure | General Equilibrium | Markov Regime Shifts |
Saved in:
freely available
Extent: | application/pdf |
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Series: | |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | The text is part of a series Econometric Society North American Summer Meetings 2004 Number 304 |
Classification: | G12 - Asset Pricing ; E43 - Determination of Interest Rates; Term Structure Interest Rates |
Source: |
Persistent link: https://www.econbiz.de/10005342209
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