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Title:Cointegration and Regime-Switching Risk Premia in the U.S. Term Structure of Interest Rates PDF Logo
Authors:Tillmann, Peter
Issue Date:2003
Series/Report no.:Bonn econ discussion papers 2003,27
Abstract:To date the cointegrating properties and the regimeswitching behavior of the term structure are two separate strands of the literature. This paper integrates these lines of research and introduces regime shifts into a cointegrated VAR model. We argue that the short run dynamics of the cointegrated model are likely to shift across regimes while the equilibrium relation implied by the expectations hypothesis of the term structure is robust to regime shifts. A Markov-switching VECM approach for U.S. data outperforms a linear VECM. Moreover, the regime shifts in the risk premium and the equilibrium adjustment reflect shifts in monetary policy.
Subjects:term structure
expectations hypothesis
cointegration
Markov-switching
monetary policy
JEL:E52
E43
Document Type:Working Paper
Appears in Collections:Bonn Econ Discussion Papers, Bonn Graduate School of Economics (BGSE), Universität Bonn

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