Term structure models and the zero bound: An empirical investigation of Japanese yields

Don H. Kim and Kenneth Singleton

Journal of Econometrics, 2012, vol. 170, issue 1, 32-49

Abstract: When Japanese short-term bond yields were near their zero bound, yields on long-term bonds showed substantial fluctuation, and there was a strong positive relationship between the level of interest rates and yield volatilities/risk premiums. We explore whether several families of dynamic term structure models that enforce a zero lower bound on short rates imply conditional distributions of Japanese bond yields consistent with these patterns. Multi-factor “shadow-rate” and quadratic-Gaussian models, evaluated at their maximum likelihood estimates, capture many features of the data. Furthermore, model-implied risk premiums track realized excess returns during extended periods of near-zero short rates. In contrast, the conditional distributions implied by non-negative affine models do not match their sample counterparts, and standard Gaussian affine models generate implausibly large negative risk premiums.

JEL-codes: C32 C51 C52 E43 G12 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (187)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:170:y:2012:i:1:p:32-49

DOI: 10.1016/j.jeconom.2011.12.005

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