Dynamic Term Structure Models: The Best Way to Enforce the Zero Lower Bound in the United States

64 Pages Posted: 2 Oct 2015 Last revised: 9 Oct 2015

See all articles by Martin M. Andreasen

Martin M. Andreasen

Aarhus University; CREATES, Aarhus University

Andrew Meldrum

Board of Governors of the Federal Reserve System

Date Written: September 25, 2015

Abstract

This paper studies whether dynamic term structure models for US nominal bond yields should enforce the zero lower bound by a quadratic policy rate or a shadow rate specification. We address the question by estimating quadratic term structure models (QTSMs) and shadow rate models (SRMs) with at most four pricing factors. Our findings suggest that QTSMs give a better in-sample fit than SRMs with two and three factors, whereas the SRM marginally dominates with four factors. Loadings from Campbell-Shiller regressions are generally better matched by the SRMs, which also outperform the QTSMs when forecasting bond yields, particularly with four pricing factors.

Keywords: Bias-adjustment, forecasting study, quadratic term styructure models, sequential regression approach, shadow rate models

JEL Classification: C10, C50, G12

Suggested Citation

Andreasen, Martin M. and Meldrum, Andrew, Dynamic Term Structure Models: The Best Way to Enforce the Zero Lower Bound in the United States (September 25, 2015). Bank of England Working Paper No. 550, Available at SSRN: https://ssrn.com/abstract=2667562 or http://dx.doi.org/10.2139/ssrn.2667562

Martin M. Andreasen (Contact Author)

Aarhus University ( email )

Aarhus
Denmark

CREATES, Aarhus University ( email )

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

HOME PAGE: http://econ.au.dk/research/research-centres/creates/people/junior-fellows/martin-andreasen/

Andrew Meldrum

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
52
Abstract Views
571
rank
414,208
PlumX Metrics