This paper focuses on interest rate models with regime switching and extends previous nonlinear threshold models by relaxing the assumption of a fixed number of regimes. Instead we suggest automatic model determination through Bayesian inference via the reversible jump Markov Chain Monte Carlo (MCMC) algorithm. Moreover, we allow the thresholds in the volatility to be driven not only by the interest rate but also by other economic factors. We illustrate our methodology by applying it to interest rates and other economic factors of the American economy.

Original publication

DOI

10.1080/07474930701220600

Type

Journal article

Journal

Econometric Reviews

Publication Date

01/03/2007

Volume

26

Pages

419 - 437