Change-points in affine arbitrage-free term structure models

Siddhartha Chib, Kyu Ho Kang

Research output: Contribution to journalArticle

12 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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