Regime shifts in interest rate volatility

I find evidence of regime shifts in interest rate volatility using short-rate data from the U.S., the U.K., Japan, and Canada. The regime shifts, if unaccounted for, could lead to spurious volatility persistence when the volatility processes are estimated with the stochastic volatility (SVOL) model. In contrast, the apparent persistence in volatility drops sharply in three out of the four countries when I estimate the volatility processes with the regime-switching stochastic volatility (RSSV) model. I also contribute to the literature by showing how to account for correlation in the regime-switching stochastic volatility model, which is important for modeling asymmetric volatility.