Term Structure Models and the Zero Bound: An Empirical Investigation of Japanese Yields

39 Pages Posted: 28 Aug 2010

See all articles by Don H. Kim

Don H. Kim

Board of Governors of the Federal Reserve System

Kenneth J. Singleton

Stanford University - Graduate School of Business

Date Written: August 27, 2010

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 premia. 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 thier sample counterparts, and standard Gaussian affine models generate implausibly large negative risk premiums.

Keywords: positive interest, term structure models, zero bound, Japanese yields

JEL Classification: C32, C51, C52, E43, G12

Suggested Citation

Kim, Don H. and Singleton, Kenneth J., Term Structure Models and the Zero Bound: An Empirical Investigation of Japanese Yields (August 27, 2010). Available at SSRN: https://ssrn.com/abstract=1666698 or http://dx.doi.org/10.2139/ssrn.1666698

Don H. Kim

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Kenneth J. Singleton (Contact Author)

Stanford University - Graduate School of Business ( email )

Knight Management Center
655 Knight Way
Stanford, CA 94305-7298
United States
650-723-5753 (Phone)

HOME PAGE: http://www.stanford.edu/~kenneths

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