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Conference Paper
Regime shifts in a dynamic term structure model of U.S. Treasury bond yields
This paper develops and empirically implements an arbitrage-free, dynamic term structure model with "priced" factor and regime-shift risks. The risk factors are assumed to follow a discrete-time Gaussian process, and regime shifts are governed by a discrete-time Markov process with state-dependent transition probabilities. This model gives closed-form solutions for zero-coupon bond prices and an analytic representation of the likelihood function for bond yields. Using monthly data on U.S. Treasury zero-coupon bond yields, we document notable differences in the behaviours of the market ...
Working Paper
An empirical investigation of consumption-based asset pricing models with stochastic habit formation
We econometrically estimate a consumption-based asset pricing model with stochastic internal habit and test it using the generalized method of moments. The model departs from existing models with deterministic internal habit (e.g., Dunn and Singleton (1983), Ferson and Constan- tinides (1991), and Heaton (1995)) by introducing shocks to the coefficients in the distributed lag specification of consumption habit and consequently an additional shock to the marginal rate of substitution. The stochastic shocks to the consumption habit are persistent and provide an additional source of time ...