Change-points in affine arbitrage-free term structure models

Siddhartha Chib, Kyu Ho Kang

    Research output: Contribution to journalArticlepeer-review

    20 Citations (Scopus)

    Abstract

    In this paper, we investigate the timing of structural changes in yield curve dynamics in the context of an arbitrage-free, one latent and two macroeconomic factors, affine term structure model. We suppose that all parameters in the model are subject to changes at unknown time points. We fit a number of models to the U.S. term structure data and find support for three change-points. We also find that the term structure and the risk premium are materially different across regimes and that the out-of-sample forecasts of the term structure improve from incorporating regime changes.

    Original languageEnglish
    Article numbernbs004
    Pages (from-to)302-334
    Number of pages33
    JournalJournal of Financial Econometrics
    Volume11
    Issue number2
    DOIs
    Publication statusPublished - 2013 Mar

    Keywords

    • Bayesian inference
    • Change-points
    • Macro-finance
    • Marginal likelihood
    • Markov chain monte carlo
    • Regime changes
    • State-space model
    • Stochastic discount factor
    • Term premium
    • Yield curve

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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