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Department of Economics, Lund University Working Papers, Department of Economics, Lund University

No 2002:5:
Regime Switches in Swedish Interest Rates

Ulf Erlandsson

Abstract: This paper examines the forecasting properties of a Markov regime-switching model applied to Swedish interest rate volatility. A Monte Carlo testing procedure is used to arrive at a three state specification that is able to capture the high degree of leptokurtosis in the data without additional modelling of conditional heteroskedasticity. The final specification is shown to possess good forecasting properties both in general and for specific samples and horizons, something that the benchmark processes are unable to achieve.

Keywords: Regime switching; forecasting; volatility; (follow links to similar papers)

JEL-Codes: C22; C52; E43; (follow links to similar papers)

20 pages, February 26, 2002, Revised March 4, 2005

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