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Term Structure Modeling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs

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  • Li, Canlin

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

  • Wei, Min

    ()

    (Board of Governors of the Federal Reserve System (U.S.))

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    Abstract

    This paper estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and uses it to evaluate the term premium effects of the Federal Reserve's large-scale asset purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the maturity extension program jointly reduced the 10-year Treasury yield by about 100 basis points.

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    File URL: http://www.federalreserve.gov/pubs/feds/2014/201407/201407pap.pdf
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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2014-7.

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    Length: 34 pages
    Date of creation: 24 Mar 2014
    Date of revision:
    Handle: RePEc:fip:fedgfe:2014-07
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    Keywords: No-arbitrage term structure models; Yield curve; Preferred habitat; Supply effects; Factor models; Large-scale asset purchases (LSAP); Agency mortgage-backed securities (MBS);

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    1. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 627-627, November.
    2. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    3. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    4. Vayanos, Dimitri & Vila, Jean-Luc, 2009. "A Preferred-Habitat Model of the Term Structure of Interest Rates," CEPR Discussion Papers 7547, C.E.P.R. Discussion Papers.
    5. Kim, Don H. & Orphanides, Athanasios, 2012. "Term Structure Estimation with Survey Data on Interest Rate Forecasts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(01), pages 241-272, April.
    6. Stefania D'Amico & William B. English & David López-Salido & Edward Nelson, 2012. "The Federal Reserve's large-scale asset purchase programs: rationale and effects," Finance and Economics Discussion Series 2012-85, Board of Governors of the Federal Reserve System (U.S.).
    7. Michael D. Bauer & Glenn D. Rudebusch, 2014. "The Signaling Channel for Federal Reserve Bond Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 233-289, September.
    8. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    9. Hess Chung & Jean-Philippe Laforte & David L. Reifschneider & John C. Williams, 2011. "Have we underestimated the likelihood and severity of zero lower bound events?," Working Paper Series 2011-01, Federal Reserve Bank of San Francisco.
    10. Jack Meaning & Feng Zhu, 2011. "The impact of recent central bank asset purchase programmes," BIS Quarterly Review, Bank for International Settlements, December.
    11. repec:fip:fedgsq:y:2011:i:feb25 is not listed on IDEAS
    12. Darrell Duffie & Rui Kan, 1996. "A Yield-Factor Model Of Interest Rates," Mathematical Finance, Wiley Blackwell, vol. 6(4), pages 379-406.
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