Markov Regime Switching Model and Empirical Analysis of the Term Structure of Interest Rates
By introducing Markov regime switching into the term structure of interest rates, this paper extends traditional CKLS model to a more commonly state-dependent CKLS model,which is applied to study on six different groups of maturities of China inter-bank offered rates(CHIBOR) using monthly data spanning 1996:01 - 2006:03. On the analysis of estimating and examining,we find that both the drift and diffusion function of different maturities are nonlinear under regimes, where the drift function appears to be a process of strong random walk or mean reversion, and the diffusion function appears to be a state of low volatility or high volatility.Additionally, the results show that the term structure of interest rates of different maturities can be obtained with the nested Markov regime switching CKLS model.
