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Term-structure modelling at the zero lower bound: Implications for estimating the forward term premium

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  • Chung, Tsz-Kin
  • Hui, Cho-Hoi
  • Li, Ka-Fai

Abstract

Although the affine Gaussian term-structure model has been a workhorse model in term-structure modelling, it remains doubtful whether it is an appropriate model in a low interest rate environment. This paper uses an alternative quadratic Gaussian-term structure model which is well known to be as tractable as the affine model and yet is suitable for interest rates close to zero. Compared with the quadratic model under the zero lower bound, we illustrate how the forward term premium can be biased upward under the affine model both theoretically and empirically.

Suggested Citation

  • Chung, Tsz-Kin & Hui, Cho-Hoi & Li, Ka-Fai, 2017. "Term-structure modelling at the zero lower bound: Implications for estimating the forward term premium," Finance Research Letters, Elsevier, vol. 21(C), pages 100-106.
    • Handle: RePEc:eee:finlet:v:21:y:2017:i:c:p:100-106
    DOI: 10.1016/j.frl.2016.12.001
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    More about this item

    Keywords

    Forward term premium; Zero lower bound; Quadratic Gaussian term-structure model; Bayesian MCMC;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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