| Abstract: | This article addresses some empirical problems in the term structureof interest rates using a threshold autoregressive frameworkwith GARCH errors. This framework provides a parsimonious representationof some stylized features of interest rate data and facilitatesstatistical inference in the presence of high persistence andconditional heteroskedasticity. We propose a bootstrap-basedLM test for linearity in the conditional mean and variance functions.The empirical results indicate a presence of threshold nonlinearitiesin the AR and GARCH representations of the conditional momentsof short-term rate. The explicit modeling of these nonlinearitiesappears to improve the stability properties of the process forspot rate. The article also reports that allowing for thresholdnonlinearities in conditional mean and variance leads to significantforecast improvements. The economic significance of these findingsis evaluated by the term structure implications of the estimatedTAR-GARCH model. |
