Nelson-Siegel Decay Factor and Term Premia in Japan

30 Pages Posted: 17 Mar 2020 Last revised: 7 May 2021

See all articles by Junko Koeda

Junko Koeda

Waseda University - School of Political Science and Economics

Atsushi Sekine

School of Political Science and Economics, Meiji University

Date Written: February 16, 2020

Abstract

This study examines the two-decade-long low interest rate environment in Japan using the Nelson-Siegel yield curve framework emphasizing the role of decay factor. We find that the decay factor has declined particularly after the global financial crisis, pushing down the entire yield curve as well as the conditional variance of bond yield in Japan. The decay factor was very low when BOJ’s yield curve control started in 2016 and remained low with small fluctuations since. Decay factor shocks can be interpreted as long-dated term premium shocks, and these shocks tend to decrease with BOJ’s bond purchases, controlling for other possible factors that affect term premia such as business cycles and economic uncertainty.

Keywords: decay factor, Nelson Siegel, term premium, yield curve control, Japan, nonlinear state space model

JEL Classification: E58, E52, C32

Suggested Citation

Koeda, Junko and Sekine, Atsushi, Nelson-Siegel Decay Factor and Term Premia in Japan (February 16, 2020). Available at SSRN: https://ssrn.com/abstract=3538961 or http://dx.doi.org/10.2139/ssrn.3538961

Junko Koeda (Contact Author)

Waseda University - School of Political Science and Economics ( email )

1-6-1 Nishi-Waseda
Shinjuku-ku, Tokyo 169-8050, Tokyo 169-8050
Japan

Atsushi Sekine

School of Political Science and Economics, Meiji University ( email )

1-1 Kanda Surugadai
Surugadai, Chiyoda, 101-8301
Japan

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