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A regime-switching Nelson–Siegel term structure model of the macroeconomy

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  • Zhu, Xiaoneng
  • Rahman, Shahidur

Abstract

This paper presents a regime-switching Nelson–Siegel term structure model with macro factors and introduces a Markov chain Monte Carlo procedure to estimate the model. We find that regime shifts are important for understanding the interaction between the yield curve and economic activity. We also find that two regimes are closely related to the business cycle and monetary policy. Finally, we find that the proposed regime-switching model with macro factors is competitive in the out-of-sample forecasting of bond yields.

Suggested Citation

  • Zhu, Xiaoneng & Rahman, Shahidur, 2015. "A regime-switching Nelson–Siegel term structure model of the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 1-17.
    • Handle: RePEc:eee:jmacro:v:44:y:2015:i:c:p:1-17
    DOI: 10.1016/j.jmacro.2014.12.007
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    More about this item

    Keywords

    Economic activity; Macro factors; MCMC; Nelson–Siegel model; The term structure;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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