Market Segmentation and Limits to Arbitrage under Negative Interest Rates: Evidence from the Bank of Japan’s QQE

25 Pages Posted: 10 Aug 2017 Last revised: 15 Jan 2019

Date Written: August 9, 2017

Abstract

This paper decomposes the bond yield into the segmentation factor using Japan’s unique dataset. For controlling the channel of future expectation and the term premium, we take advantage of the government guaranteed bond, which is the identical asset as the government bond except the liquidity and has not institutionally affected by the demand of BOJ, and extends Krishnamurthy et al. (2015) model for capturing the liquidity factor explicitly. Our result shows the market has segmented during the time when the government bond yield turns negative although the segmentation factor is considerably small during the normal time.

Keywords: Preferred Habitat, Market Segmentation, Quantitative Easing, Term Structure of Interest Rate, Zero Lower Bound

JEL Classification: E43, E52, E58, E65, G12, G14

Suggested Citation

Hattori, Takahiro, Market Segmentation and Limits to Arbitrage under Negative Interest Rates: Evidence from the Bank of Japan’s QQE (August 9, 2017). Available at SSRN: https://ssrn.com/abstract=3015701 or http://dx.doi.org/10.2139/ssrn.3015701

Takahiro Hattori (Contact Author)

Ministry of Finance - Japan ( email )

3-1-1 Kasumigaseki
Chiyoda-ku
Tokyo, 100-8940
Japan

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