A Dynamic Yield Curve Model with Stochastic Volatility and Non-Gaussian Interactions: An Empirical Study of Non-Standard Monetary Policy in the Euro Area

Tinbergen Institute Discussion Paper 14-071/III

44 Pages Posted: 21 Jun 2014

See all articles by Geert Mesters

Geert Mesters

Vrije Universiteit Amsterdam, School of Business and Economics

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics; Tinbergen Institute; Aarhus University - CREATES

Date Written: June 17, 2014

Abstract

We develop an econometric methodology for the study of the yield curve and its interactions with measures of non-standard monetary policy during possibly turbulent times. The yield curve is modeled by the dynamic Nelson-Siegel model while the monetary policy measurements are modeled as non-Gaussian variables that interact with latent dynamic factors, including the yield factors of level and slope. Yield developments during the financial and sovereign debt crises require the yield curve model to be extended with stochastic volatility and heavy tailed disturbances. We develop a flexible estimation method for the model parameters with a novel implementation of the importance sampling technique. We empirically investigate how the yields in Germany, France, Italy and Spain have been a ected by monetary policy measures of the European Central Bank. We model the euro area interbank lending rate EONIA by a log-normal distribution and the bond market purchases within the ECB's Securities Markets Programme by a Poisson distribution. We nd evidence that the bond market interventions had a direct and temporary e ect on the yield curve lasting up to ten weeks, and nd limited evidence that purchases changed the relationship between the EONIA rate and the term structure factors.

Keywords: dynamic Nelson-Siegel models, Central bank asset purchases, non-Gaussian, state space methods, importance sampling, European Central Bank

JEL Classification: C32, C33, E52, E58

Suggested Citation

Mesters, Geert and Schwaab, Bernd and Koopman, Siem Jan, A Dynamic Yield Curve Model with Stochastic Volatility and Non-Gaussian Interactions: An Empirical Study of Non-Standard Monetary Policy in the Euro Area (June 17, 2014). Tinbergen Institute Discussion Paper 14-071/III, Available at SSRN: https://ssrn.com/abstract=2456624 or http://dx.doi.org/10.2139/ssrn.2456624

Geert Mesters (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Bernd Schwaab

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Siem Jan Koopman

Vrije Universiteit Amsterdam - School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands
+31205986019 (Phone)

HOME PAGE: http://sjkoopman.net

Tinbergen Institute ( email )

Gustav Mahlerplein 117
1082 MS Amsterdam
Netherlands

HOME PAGE: http://personal.vu.nl/s.j.koopman

Aarhus University - CREATES ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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