A model of the euro-area yield curve with discrete policy rates

Jean-Paul Renne

Studies in Nonlinear Dynamics & Econometrics, 2017, vol. 21, issue 1, 99-116

Abstract: This paper presents a no-arbitrage yield-curve model that explicitly incorporates the central-bank policy rate. This model is consistent with the existence of a lower bound for nominal interest rates, which makes it particularly relevant in the current context of extremely low interest rates. Changes in the policy rates depend on the monetary-policy phase, that can be either in an easing, status quo or tightening mode. The estimation of the model, based on daily euro-area yield data, reveals the strong influence of the monetary-policy phases on the shape of the yield curve. This relationship can, in turn, be exploited to estimate the probabilities of being in the different monetary-policy phases. The model is also used to compute term premiums, that are the parts of the yields reflecting the aversion of investors to interest rate risk. The results point to the existence of statistically significant premiums for many dates, even for short horizons.

Keywords: affine term-structure models; zero lower bound; regime switching models (search for similar items in EconPapers)
JEL-codes: E43 E44 E47 E52 G12 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
https://doi.org/10.1515/snde-2016-0043 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
Working Paper: A model of the euro-area yield curve with discrete policy rates (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:sndecm:v:21:y:2017:i:1:p:99-116:n:1

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/snde/html

DOI: 10.1515/snde-2016-0043

Access Statistics for this article

Studies in Nonlinear Dynamics & Econometrics is currently edited by Bruce Mizrach

More articles in Studies in Nonlinear Dynamics & Econometrics from De Gruyter
Bibliographic data for series maintained by Peter Golla ().