Nonlinear Interest Rate Dynamics and Implications for the Term Structure

This paper explores nonlinear dynamics for the time series of the short term interest rate in the United States. The proposed model is an autoregressive threshold model augmented by conditional heteroskedasticity. The performance of the model is evaluated by considering its implications for the term structure of interest rates. The nonlinear dynamics imply a form of nonlin-earity in the levels relation between the long and the short rate. Empirical results indicate that the implied nonlinearity is present in the data. for some helpful comments. Of course all errors are our own.