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Nelson–Siegel decay factor and term premia in Japan

Junko Koeda and Atsushi Sekine ()

Journal of the Japanese and International Economies, 2022, vol. 64, issue C

Abstract: This study examines the low–interest rate environment in Japan from mid-1990 to the end of 2020, using a dynamic Nelson–Siegel framework emphasizing the role of the decay factor. A regime-switching model estimates that the regime with low decay factor and bond yield volatility (“low” regime) has persisted since the early years of Bank of Japan's quantitative and qualitative monetary easing (QQE) policy. A shift away from the low regime can instantly increase the 10-year government bond yield by over 50 basis points by increasing the term premiums with little changes in the expected short rate.

Keywords: Decay factor; Nelson–Siegel; Term premium; Yield curve control; Japan; Regime switching; State space model (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.jjie.2022.101204

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