Regime Switching Stochastic Volatility and Short-Term Interest Rates
Author | : Madhu Kalimipalli |
Publisher | : |
Total Pages | : |
Release | : 2003 |
Genre | : |
ISBN | : |
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In this paper, we introduce regime-switching in a two-factor stochastic volatility (SV) model to explain the behavior of short-term interest rates. We model the volatility of short-term interest rates as a stochastic volatility process whose mean is subject to shifts in regime. We estimate the regime-switching stochastic volatility (RSV) model using a Gibbs Sampling-based Markov Chain Monte Carlo algorithm. In-sample results strongly favor the RSV model in comparison to the single-state SV model and GARCH family of models. Out-of-sample results are mixedand, overall, provide weak support for the RSV model.