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- Publisher
- Oxford University Press
- Copyright
- The Author, 2013. Published by Oxford University Press. All rights reserved. For Permissions, please email: journals.permissions@oup.com
- ISSN
- 1479-8409
- eISSN
- 1479-8417
- DOI
- 10.1093/jjfinec/nbs021
- Publisher site
- See Article on Publisher Site
Abstract
This article presents a dynamic NelsonSiegel term structure model subject to regime shifts. To estimate the model, we introduce the reversible jump Markov chain Monte Carlo method, which allows jumps between the one-, two-, and three-regime models. The empirical results support the two-regime NelsonSiegel term structure model. The empirical results also suggest that the regime-switching NelsonSiegel term structure model forecasts better out-of-sample than the single-regime NelsonSiegel model and other competing models. In addition, our economic analysis is favorable to the better forecasting performance of the regime-switching NelsonSiegel model. Using the Diebold-Li bond yields, we find that the better forecasting performance is robust. Finally, two regimes are found to be related to business cycle conditions and monetary policy.
Journal
Journal of Financial Econometrics – Oxford University Press
Published: Jun 21, 2013
Keywords: JEL C5 E47 G12