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Term-Structure Modelling at the Zero Lower Bound: Implications for Estimating the Term Premium

Author

Listed:
  • Tsz-Kin Chung

    (Tokyo Metropolitan University)

  • Cho-Hoi Hui

    (Hong Kong Monetary Authority)

  • Ka-Fai Li

    (Hong Kong Monetary Authority)

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 because of its inability to preclude negative interest rates. 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 estimated term premium can be biased upward under the affine model. In contrast to the affine model, our numerical study shows that the quadratic model renders the estimated term premium less likely to be affected by the persistence of the data near the zero lower bound.

Suggested Citation

  • Tsz-Kin Chung & Cho-Hoi Hui & Ka-Fai Li, 2015. "Term-Structure Modelling at the Zero Lower Bound: Implications for Estimating the Term Premium," Working Papers 212015, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:212015
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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
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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