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Staying at zero with affine processes: an application to term structure modelling

Alain Monfort (), Fulvio Pegoraro, Jean-Paul Renne and Guillaume Roussellet ()

Rue de la Banque, 2017, issue 52

Abstract: The recent financial crises observed in the United States, the United Kingdom and the euro area have led their respective central banks to bring policy rates down to unprecedented low levels, with an associated dramatic drop of their yield curves. Short term rates have remained at their lower bound for extended periods of time while longer term rates have fluctuated with relatively high volatilities. This paper describes a new class of non-negative affine term structure models introduced by Monfort et al. (2017) and used to replicate these features of the yield curve. The proposed empirical analysis also suggests that ignoring interest rate risk premia implies a substantial underestimation of the length of the zero lower bound regime.

Date: 2017
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Related works:
Journal Article: Staying at zero with affine processes: An application to term structure modelling (2017) Downloads
Working Paper: Staying at Zero with Affine Processes: An Application to Term Structure Modelling (2015) Downloads
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