The Empirical Analysis Of The Markov Regime Switching Model For The Short-term Interest Rate In Our Country

The interest rate is the most important variable for price in the finance market. In the interest rate system that contains various different term structures, the short-term interest rate takes up an important station. It affects the pricing of fixed income securities and their derivatives directly, and is also important for the analysis of the risk management of the interest rate, the pricing of assets and the yield curve. In addition, the short-term interest rate takes up a major station in the transmit of monetary policy. With the importance of the short-term interest rate, it makes an important sense to investigate its dynamic behavior.Consequently, the paper takes the 7-date interbank rates as the representation of short-term interest rate,and adopts a markov regime switching model for it. At present, many countries have adopted the markov regime switching model for the short-term interest rate, and have made a good result. However, there are few articles taking this kind of model to analyze the dynamic behavior of the short-term interest rate in our country. With investigation, we find that the short-term interest rate of our country satisfies a two regime markov regime switching model. The short-term interest rate is similar to a unit root process when the short-term interest rate is low and the variance of short-term interest rate is small, and displays mean reversion behavior when the short-term interest rate is high and the variance of short-term interest rate is large.At the same time, because the power of standard unit root test is low when it tests the data which subjects to regime switching, the paper applies a new approach of unit root test, calling Markov-Switching unit root test(MSADF for short later). It has been proved that the MSADF performs better than the standard unit root test.