Are Shadow Rate Models of the Treasury Yield Curve Structurally Stable?

Don H. Kim and Marcel A. Priebsch
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Don H. Kim: https://www.federalreserve.gov/econres/don-h-kim.htm
Marcel A. Priebsch: https://www.federalreserve.gov/econres/marcel-a-priebsch.htm

No 2020-061, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We examine the structural stability of Gaussian shadow rate term structure models of Treasury yields over a period that includes the time during which the U.S. policy rate was at its effective lower bound. After a conceptual discussion of several potential sources of a structural break in the context of the shadow rate model, we document various pieces of evidence for structural instability based on predictive tests and Lagrange multiplier tests, as well as with separate estimations of the pre-ELB and post-ELB subsamples. In order to overcome the difficulties associated with the latent-factor nature of the model in testing for a structural break, we focus on objects that can be given intuitive interpretation, such as principal components, or that are constructed to be invariant to factor rotations.

Keywords: Shadow rate term structure models; Treasury yields; ELB; Structural break; Structural instability; Factor rotations; Principal components (search for similar items in EconPapers)
JEL-codes: E43 E44 G12 (search for similar items in EconPapers)
Pages: 44 p.
Date: 2020-08-20
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-61

DOI: 10.17016/FEDS.2020.061

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