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Bond Pricing when the Short-Term Interest Rate Follows a Threshold Process

Vereinigtes Königreich
Publication Date
  • Economics
  • Wirtschaft
  • Bond Pricing
  • Term Structure Of Interest Rates
  • Threshold Models
  • Financial Planning
  • Accountancy
  • Investment
  • Economic Statistics
  • Econometrics
  • Business Informatics
  • Finanzwirtschaft
  • Rechnungswesen
  • Investition
  • Wirtschaftsstatistik
  • Ökonometrie
  • Wirtschaftsinformatik
  • Theory Application
  • Theorieanwendung
  • Economics


This paper derives analytical solutions for arbitrage-free bond yields when the short-term interest rate follows an autoregressive process with the intercept switching endogenously. This process from the SETAR family is especially suited to capture the near-unit-root behavior typically observed in the evolution of short-term interest rates. The derived yield functions, mapping the one-month rate into n-period yields, exhibit a convex/concave shape to the left and the right of the threshold value, respectively; a pattern which is also found in US bond yield data. The longer the time to maturity, the more distinct the nonlinearity of the yield function becomes.

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