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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.

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.

Suggested Citation

  • Kim, Don H. & Singleton, Kenneth J., 2012. "Term structure models and the zero bound: An empirical investigation of Japanese yields," Journal of Econometrics, Elsevier, vol. 170(1), pages 32-49.
  • Handle: RePEc:eee:econom:v:170:y:2012:i:1:p:32-49
    DOI: 10.1016/j.jeconom.2011.12.005
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    More about this item

    JEL classification:

    • 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
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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