A regime switching macro-nance model of the term structure

This paper presents and estimates a regime switching macro-…nance model of the term structure with latent and macroeconomic factors. The joint dynamics of the yield and macro factors are examined simultaneously. Both the canonical yields-only model and the macro-…nance model capture two regimes in the state equation that relate to a turbulent period and a tranquil period. Statistically, the formal tests indicate signi…cant bidirectional linkages between the yield curve and economic activity. I also examine how the yield factors respond to shocks to the macro factors and the feedback of the macro factors to the yield curve. Finally, I …nd that the theoretical level implied by the expectations hypothesis is a good approximation of the actual level factor in the regime-shifting macro-…nance model framework.