A Smooth Shadow-Rate Dynamic Nelson-Siegel Model for Yields at the Zero Lower Bound

Daan Opschoor and Michel van der Wel
Additional contact information
Daan Opschoor: Erasmus University Rotterdam
Michel van der Wel: Erasmus University Rotterdam

No 22-011/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We propose a smooth shadow-rate version of the dynamic Nelson-Siegel (DNS) model to analyze the term structure of interest rates during the recent zero lower bound (ZLB) period. By relaxing the no-arbitrage restriction, our shadow-rate model becomes highly tractable with a closed-form yield curve expression. The model easily permits the implementation of readily available DNS extensions such as time-varying loadings, integration of macroeconomic variables and time-varying volatility. Using U.S. Treasury data, we provide clear evidence of a smooth tran- sition of the yields entering and leaving the ZLB state. Moreover, we show that the smooth shadow-rate DNS model dominates the baseline DNS model in terms of fitting and forecasting the yield curve, while being competitive with a shadow-rate affine term structure model.

Keywords: Yield curve; zero lower bound; shadow-rate model; Nelson-Siegel curve (search for similar items in EconPapers)
JEL-codes: C53 C58 E43 E47 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://papers.tinbergen.nl/22011.pdf (application/pdf)

Related works:
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:tin:wpaper:20220011

Access Statistics for this paper

More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().