Estimating Shadow-Rate Term Structure Models with Near-Zero Yields

Jens H. E. Christensen and Glenn Rudebusch

Journal of Financial Econometrics, 2015, vol. 13, issue 2, 226-259

Abstract: Standard Gaussian affine dynamic term structure models do not rule out negative nominal interest rates—a conspicuous defect with yields near zero in many countries. Alternative shadow-rate models, which respect the nonlinearity at the zero lower bound, have been rarely used because of the extreme computational burden of their estimation. However, by valuing the call option on negative shadow yields, we provide estimates of a three-factor shadow-rate model of Japanese yields. We validate our option-based results by closely matching them using a simulation-based approach. We also show that the shadow short rate is sensitive to model fit and specification.

Keywords: affine dynamic term structure models; zero lower bound; monetary policy (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (77)

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Working Paper: Estimating Shadow-Rate Term Structure Models with Near-Zero Yields (2013)
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