An Interest Rate Model with Regime Shift Controlled by a Threshold Function
Date Issued
2007
Date
2007
Author(s)
Hou, Kun-sui
DOI
en-US
Abstract
Interest rate models abiding by the martingale pricing theory are economically
meaningful, but usually strongly rejected by specification tests.
Recently, a regime switching model proposed by Bansal and Zhou (2002)
was found to match the statistical properties of yield curves very well, but it
assumed that regimes are unobservable such that the yield of next period is
un-predictable from the present information. This study is a first attempt to
propose a family of models with regime shift controlled by a threshold function,
which is also derived from the martingale pricing theory. The family of
models could be used to predict the regime and the yield of the next period
from the present information. Among them, one simple threshold model
with the threshold function a linear form of the realized pricing kernel value
and two threshold parameters is used to fit six month and five year yields
by Efficient Method of Moment (EMM). Along with some reasonable modifications
on the standard EMM procedures, the estimation could be done
within half an hour on PCs with 1.7GHz CPU. The computer programs developed
during this study may serve as a useful tool for future investigation
on this family of threshold models.
Subjects
資產定價理
論
利
率
模型
馬可夫轉態利
門檻模型
效率
動差法
Martingale Pricing Theory
Regime Switching Models
Markov Switching Models
Threshold Models
Efficient Method of Moment
Type
thesis
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