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
Date Written: June 17, 2014
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 aected 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 eect 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: Suggested Citation