Term Structure Models and the Zero Bound: An Empirical Investigation of Japanese Yields
39 Pages Posted: 28 Aug 2010
Date Written: August 27, 2010
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
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