A tractable framework for zero-lower-bound Gaussian term structure models

Leo Krippner

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: When nominal interest rates are near their zero lower bound (ZLB), as in many developed economies at the time of writing, it is theoretically untenable to apply the popular class of Gaussian affine term structure models (GATSMs) given their inherent material probabilities of negative interest rates. Hence, I propose a tractable modification for GATSMs that enforces the ZLB, and which approximates the fully arbitrage-free but much less tractable framework proposed in Black (1995). I apply my framework to United States yield curve data, with robust estimation via the iterated extended Kalman filter, and first show that the two-factor results are very similar to those from a comparable Black model. I then estimate two- and three-factor models with longer-maturity data sets to illustrate that my ZLB framework can readily be applied in circumstances would computationally burdensome or infeasible within the Black framework.

Keywords: zero lower bound; term structure of interest rates; Gaussian affine term structure models; shadow short rate; shadow term structure (search for similar items in EconPapers)
JEL-codes: E43 G12 G13 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2013-08
New Economics Papers: this item is included in nep-ecm and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (99)

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Working Paper: A tractable framework for zero lower bound Gaussian term structure models (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2013-49

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