Journal of Korean Institute of Industrial Engineers (대한산업공학회지)

Korean Institute of Industrial Engineers (대한산업공학회)
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The Behavior of the Term Structure of Interest Rates with the Markov Regime Switching Models

마코프 국면전환을 고려한 이자율 기간구조 연구

  • Rhee, Yu-Na (Department of Industrial and Management Engineering, Pohang University of Science and Technology) ;
  • Park, Se-Young (Department of Industrial and Management Engineering, Pohang University of Science and Technology) ;
  • Jang, Bong-Gyu (Department of Industrial and Management Engineering, Pohang University of Science and Technology) ;
  • Choi, Jong-Oh (Derivatives Coordination Team, Financial Supervisory Service)
  • 이유나 (POSTECH 산업경영공학과) ;
  • 박세영 (POSTECH 산업경영공학과) ;
  • 장봉규 (POSTECH 산업경영공학과) ;
  • 최종오 (금융감독원 파생상품총괄팀)
  • Received : 2010.06.30
  • Accepted : 2010.08.18
  • Published : 2010.09.01
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Abstract

This study examines a cointegrated vector autoregressive (VAR) model where parameters are subject to switch across the regimes in the term structure of interest rates. To employ the regime switching framework, the Markov-switching vector error correction model (MS-VECM) is allowed to the regime shifts in the vector of intercept terms, the variance-covariance terms, the error correction terms, and the autoregressive coefficient parts. The corresponding approaches are illustrated using the term structure of interest rates in the US Treasury bonds over the period of 1958 to 2009. Throughout the modeling procedure, we find that the MS-VECM can form a statistically adequate representation of the term structure of interest rate in the US Treasury bonds. Moreover, the regime switching effects are analyzed in connection with the historical government monetary policy and with the recent global financial crisis. Finally, the results from the comparisons both in information criteria and in forecasting exercises with and without the regime switching lead us to conclude that the models in the presence of regime dependence are superior to the linear VECM model.

Keywords

References

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