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Term structure models and the zero bound: An empirical investigation of Japanese yields

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  • Kim, Don H.
  • Singleton, Kenneth J.
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    Abstract

    When Japanese short-term bond yields were near their zero bound, yields on long-term bonds showed substantial fluctuation, and there was a strong positive relationship between the level of interest rates and yield volatilities/risk premiums. We explore whether several families of dynamic term structure models that enforce a zero lower bound on short rates imply conditional distributions of Japanese bond yields consistent with these patterns. Multi-factor “shadow-rate” and quadratic-Gaussian models, evaluated at their maximum likelihood estimates, capture many features of the data. Furthermore, model-implied risk premiums track realized excess returns during extended periods of near-zero short rates. In contrast, the conditional distributions implied by non-negative affine models do not match their sample counterparts, and standard Gaussian affine models generate implausibly large negative risk premiums.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Econometrics.

    Volume (Year): 170 (2012)
    Issue (Month): 1 ()
    Pages: 32-49

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    Handle: RePEc:eee:econom:v:170:y:2012:i:1:p:32-49

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    Web page: http://www.elsevier.com/locate/jeconom

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    Cited by:
    1. Leo Krippner, 2012. "Measuring the stance of monetary policy in zero lower bound environments," Reserve Bank of New Zealand Discussion Paper Series DP2012/04, Reserve Bank of New Zealand.
    2. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2011. "Extracting deflation probability forecasts from Treasury yields," Working Paper Series 2011-10, Federal Reserve Bank of San Francisco.
    3. Wali Ullah & Yasumasa Matsuda, 2014. "Generalized Nelson-Siegel Term Structure Model : Do the second slope and curvature factors improve the in-sample fit and out-of-sample forecast?," TERG Discussion Papers 312, Graduate School of Economics and Management, Tohoku University.
    4. Junko Koeda, 2012. "Endogenous Monetary Policy Shifts and the Term Structure: Evidence from Japanese Government Bond Yields," CARF F-Series CARF-F-303, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo, revised Apr 2013.
    5. Christensen, Jens H.E. & Rudebusch, Glenn D., 2013. "Modeling yields at the zero lower bound: are shadow rates the solution?," Working Paper Series 2013-39, Federal Reserve Bank of San Francisco.
    6. Leo Krippner, 2013. "Efficient Jacobian evaluations for estimating zero lower bound term structure models," CAMA Working Papers 2013-77, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    7. Leo Krippner, 2013. "A tractable framework for zero lower bound Gaussian term structure models," Reserve Bank of New Zealand Discussion Paper Series DP2013/02, Reserve Bank of New Zealand.
    8. Christensen, Jens H.E. & Lopez, Jose A. & Rudebusch, Glenn D., 2013. "A probability-based stress test of Federal Reserve assets and income," Working Paper Series 2013-38, Federal Reserve Bank of San Francisco.
    9. Jens H.E. Christensen, 2013. "A regime-switching model of the yield curve at the zero bound," Working Paper Series 2013-34, Federal Reserve Bank of San Francisco.
    10. Leo Krippner, 2014. "Measuring the stance of monetary policy in conventional and unconventional environments," CAMA Working Papers 2014-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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