Working Papers,
Örebro University, School of Business

Abstract: In this paper, we assess whether key relations between US interest rates have been stable over time. This is done by estimating trivariate hybrid time-varying parameter Bayesian VAR models with stochastic volatility for the three-month Treasury bill rate, the slope of the Treasury yield curve and the corporate bond-yield spread. As a methodological contribution, we also allow for disturbances with heavy tails. We analyse monthly data from April 1953 to February 2023 both within- and out-of-sample. Our results indicate that the relations have not been stable; more speci cally, there is evidence that the equation of the corporate bond-yield spread is subject to time variation in its parameters. We also nd that an increase in the corporate bond-yield spread decreases the risk free rate. Finally, we note that while allowing for heavy tails receives a fair amount of support within sample, it appears to be of more limited importance from a forecasting p

Keywords: Bayesian inference; Stochastic volatility; Orthogonal Students t distribution; Time-varying parameter VAR

JEL-codes: C11; C32; C52; E44; E47; G17

Language: English

8 pages, March 8, 2024

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