Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2002:5: Regime Switches in Swedish Interest Rates

Ulf Erlandsson
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Ulf Erlandsson: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

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

JEL-codes: C22; C52; E43

20 pages, First version: February 26, 2002. Revised: March 4, 2005. Earlier revisions: August 26, 2003.

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