Design and Estimation of a Quadratic Term Structure Model with a Mixture of Normal Distributions
To keep yields non-negative in a quadratic Gaussian term structure model (QGTM), the short rate is represented by the quadratic form of the Gaussian state variables. The QGTM is among the most attractive candidate tools for analyzing yield curves for countries with low interest rates. However, the model is unlikely to capture the fat- tailed feature of changes in yields observed in actual bond markets. This study extends the QGTM by introducing state variables whose future distributions follow a mixture of normal distributions. This extension allows our model to accommodate vast changes in non-negative yields. As an illustrative empirical study, we applied our model to Japanese government bond (JGB) yields using the unscented Kalman filter. We then used the parameters obtained to investigate market views on past JGB interest rates by simulating future interest rate probability distributions under the physical measure and by decomposing interest rates into expected short rates and term premia.
|Date of creation:||Jun 2012|
|Date of revision:|
|Contact details of provider:|| Postal: 2-1-1 Nihonbashi, Hongoku-cho, Chuo-ku, Tokyo 103|
Web page: http://www.imes.boj.or.jp/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Markus Leippold & Liuren Wu, 2002. "Design and Estimation of Quadratic Term Structure Models," Finance 0207014, EconWPA.
- Markus Leippold & Liuren Wu, 2003. "Design and Estimation of Quadratic Term Structure Models," Review of Finance, European Finance Association, vol. 7(1), pages 47-73.
When requesting a correction, please mention this item's handle: RePEc:ime:imedps:12-e-08. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kinken)
If references are entirely missing, you can add them using this form.