Regime switching in the yield curve

✍ Scribed by Charlotte Christiansen

• Publisher: John Wiley and Sons
• Year: 2004
• Tongue: English
• Weight: 195 KB
• Volume: 24
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.10118

✦ Synopsis

Abstract

The article investigates the effect of interest‐rate variance on the shape of the yield curve with the
use of a bivariate two‐state Markov switching model for the short‐rate changes and the yield curve
slope. The two states are characterized by the variance of the short‐rate changes: low and high variance.
In the high‐variance regime the yield curve becomes steeper with the interest‐rate variance; in
the low‐variance regime the slope is independent hereof. A nonswitching specification amounts to
averaging across the two states. The economy is in the high‐variance state during unusual economic
periods. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:315–336, 2004