Assessing the Effectiveness of Date-Based Forward Guidance at the Zero Lower Bound with a Non-Gaussian Affine Term-Structure Model

HKIMR Working Paper No.19/2014

30 Pages Posted: 8 Aug 2014

See all articles by Tsz-Kin Chung

Tsz-Kin Chung

IHS Markit; Tokyo Metropolitan University

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Ka-Fai Li

Hong Kong Monetary Authority

Date Written: August 7, 2014

Abstract

Using a non-Gaussian affine term-structure model, this paper evaluates the effectiveness of the date-based forward guidance at the zero lower bound. The model extracts the expected dynamics of two state variables (the short-term interest rate and its mean) embedded in the entire Treasury yield curve. Using simulations and an event study, we find that the model’s dynamics were significantly altered by the first announcement of date-based forward guidance in August 2011 and speculation about tapering in May 2013. The model offers a probabilistic approach in assessing the market’s perception towards the Federal Reserve’s projections of the federal funds rate.

Keywords: Forward Guidance, Zero Lower Bound, Non-Gaussian Term-Structure Model

JEL Classification: E43, E43, E52, E58

Suggested Citation

Chung, Tsz-Kin and Hui, Cho-Hoi and Li, Ka-Fai, Assessing the Effectiveness of Date-Based Forward Guidance at the Zero Lower Bound with a Non-Gaussian Affine Term-Structure Model (August 7, 2014). HKIMR Working Paper No.19/2014. Available at SSRN: https://ssrn.com/abstract=2477267 or http://dx.doi.org/10.2139/ssrn.2477267

Tsz-Kin Chung

IHS Markit ( email )

Tokyo
Japan

Tokyo Metropolitan University

1-1 Minami Ohsawa Hachioji-shi
Tokyo 192-0397
Japan

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Ka-Fai Li (Contact Author)

Hong Kong Monetary Authority ( email )

55/F 2 IFC, 8 Finance Street
Central
Hong Kong
Hong Kong

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