Monetary policy regimes: implications for the yield curve and bond pricing

Item Type Journal paper

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.

Authors Filipova, Kameliya; Audrino, Francesco & De Giorgi, Enrico
Journal or Publication Title Journal of Financial Economics
Language English
Keywords Threshold regime switching model; Macroeconomic variables; Term structure of interest rates; Asset pricing; Nonlinear dynamics; Business cycles
Subjects economics
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Quantitative Economic Methods
Refereed Yes
Date 1 September 2014
Publisher Elsevier
Place of Publication Amsterdam
Volume 3
Number 113
Page Range 427-454
Number of Pages 28
ISSN 0304-405X
ISSN-Digital 1879-2774
Publisher DOI 10.1016/j.jfineco.2014.05.006
Depositing User Prof. Ph.D Francesco Audrino
Date Deposited 18 Nov 2013 18:34
Last Modified 21 Oct 2021 00:22


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Filipova, Kameliya; Audrino, Francesco & De Giorgi, Enrico (2014) Monetary policy regimes: implications for the yield curve and bond pricing. Journal of Financial Economics, 3 (113). 427-454. ISSN 0304-405X

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