Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78052
Authors: 
Ahrens, Ralf
Year of Publication: 
1999
Series/Report no.: 
CFS Working Paper 1999/14
Abstract: 
Modeling short-term interest rates as following regime-switching processes has become increasingly popular. Theoretically, regime-switching models are able to capture rational expectations of infrequently occurring discrete events. Technically, they allow for potential time-varying stationarity. After discussing both aspects with reference to the recent literature, this paper provides estimations of various univariate regime-switching specifications for the German three-month money market rate and bivariate specifications additionally including the term spread. However, the main contribution is a multi-step out-of-sample forecasting competition. It turns out that forecasts are improved substantially when allowing for state-dependence. Particularly, the informational content of the term spread for future short rate changes can be exploited optimally within a multivariate regime-switching framework.
Subjects: 
interest rates
term structure
peso problem
regime-switching
forecasting
JEL: 
C32
C53
E43
E44
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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