Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5096402 | Journal of Econometrics | 2012 | 18 Pages |
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.
Related Topics
Physical Sciences and Engineering
Mathematics
Statistics and Probability
Authors
Don H. Kim, Kenneth J. Singleton,