Term-Structure Modelling at the Zero Lower Bound: Implications for Estimating the Forward Term Premium

7 Pages Posted: 3 Nov 2015 Last revised: 12 Feb 2018

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: February 12, 2018

Abstract

Although the affine Gaussian term-structure model has been a workhorse model in termstructure modelling, it remains doubtful whether it is an appropriate model in a low interest rate environment. This paper uses an alternative quadratic Gaussian-term structure model which is well known to be as tractable as the affine model and yet is suitable for interest rates close to zero. Compared with the quadratic model under the zero lower bound, we illustrate how the forward term premium can be biased upward under the affine model both theoretically and empirically.

Keywords: term premium; zero lower bound; quadratic Gaussian term-structure model; Bayesian MCMC

JEL Classification: C11, C32, E43, E44, G12

Suggested Citation

Chung, Tsz-Kin and Hui, Cho-Hoi and Li, Ka-Fai, Term-Structure Modelling at the Zero Lower Bound: Implications for Estimating the Forward Term Premium (February 12, 2018). Finance Research Letters, Vol. 21: 100-106 (2017). Available at SSRN: https://ssrn.com/abstract=2685523 or http://dx.doi.org/10.2139/ssrn.2685523

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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