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
Date Written: February 12, 2018
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: Suggested Citation