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Estimating shadow-rate term structure models with near-zero yields

  • Jens H.E. Christensen
  • Glenn D. Rudebusch

Standard Gaussian term structure models have often been criticized for not ruling out negative nominal interest rates, but this flaw has been especially conspicuous with interest rates near zero in many countries. We provide a tractable means to estimate an alternative Gaussian shadow-rate dynamic term structure model that enforces the zero lower bound on bond yields. We illustrate this model by estimating one-, two-, and three-factor shadow-rate models on a sample of positive and near-zero Japanese bond yields. We find that the level of the shadow rate is sensitive to model fit and specification, including the number of factors employed.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2013-07.

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Date of creation: 2013
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Handle: RePEc:fip:fedfwp:2013-07
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  1. Krippner, Leo, 2013. "Measuring the stance of monetary policy in zero lower bound environments," Economics Letters, Elsevier, vol. 118(1), pages 135-138.
  2. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2010. "Inflation Expectations and Risk Premiums in an Arbitrage-Free Model of Nominal and Real Bond Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 143-178, 09.
  3. Viatcheslav Gorovoi & Vadim Linetsky, 2004. "Black's Model of Interest Rates as Options, Eigenfunction Expansions and Japanese Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 14(1), pages 49-78.
  4. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2012. "Correcting Estimation Bias in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(3), pages 454-467, April.
  5. Jens H. E. Christensen & Glenn D. Rudebusch, 2012. "The Response of Interest Rates to US and UK Quantitative Easing," Economic Journal, Royal Economic Society, vol. 122(564), pages F385-F414, November.
  6. Leo Krippner, 2011. "Modifying Gaussian term structure models when interest rates are near the zero lower bound," CAMA Working Papers 2011-36, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  7. Jens H.E. Christensen & Francis X. Diebold & Glenn D. Rudebusch, 2007. "The affine arbitrage-free class of Nelson-Siegel term structure models," Working Paper Series 2007-20, Federal Reserve Bank of San Francisco.
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