Term Structure Modelling with Supply Factors and the Federal Reserve's Large Scale Asset Purchase Programs
34 Pages Posted: 19 Dec 2012
Date Written: May 30, 2012
This paper proposes and estimates an arbitrage-free term structure model with both observable yield factors and Treasury and Agency MBS supply factors, and applies it to evaluate the term premium effects of Federal Reserve's Large Scale Asset Purchase programs. Our estimates show that the first and the second large-scale asset purchase programs and the Maturity Extension program have a combined effect of about 100 basis points on the 10-year Treasury yield.
Keywords: Yield curve, preferred habitat, supply effects, factor models, state-space models, large-scale asset purchases (LSAP)
JEL Classification: G1, E4, C5
Suggested Citation: Suggested Citation