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

Don H. Kim and Marcel A. Priebsch

Journal of Financial and Quantitative Analysis, 2024, vol. 59, issue 7, 3500-3530

Abstract: We examine the structural stability of Gaussian shadow rate term structure models in a sample of Treasury yields that includes the “effective lower bound” (ELB) period from 2008 to 2015. After highlighting the challenges of testing for structural breaks in a latent-factor model, we proceed to document various pieces of empirical evidence for a structural break. As one of several practical implications, the expected policy rate paths during ELB years are notably shallower in our model that accommodates a structural break compared with a model that imposes structurally stability.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:59:y:2024:i:7:p:3500-3530_15

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