A nonlinear DSGE model of the term structure with regime shifts
We construct and estimate the term structure implications of a small DSGE model with nominal rigidities in which the laws of motion of the structural shocks are subject to stochastic regime shifts. We demonstrate that, to a second order approximation, switching regimes generate time-varying risk premia. We then estimate the model on US data relying on information from both macroeconomic variables and the term structure. Our results support the specification with regime-switching: heteroskedasticity is a clear feature of the model's residuals and the regimes have intuitively appealing features. The model also generates non-negligible time-variability in excess holding period returns.
Year of publication: |
2010
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Authors: | Tristani, Oreste ; Amisano, Gianni |
Institutions: | Society for Economic Dynamics - SED |
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