Nelson-Siegel Decay Factor and Term Premia in a Low Interest Rate Environment
28 Pages Posted: 17 Mar 2020 Last revised: 28 Dec 2020
Date Written: February 16, 2020
This study examines the two-decade-long low interest rate environment in Japan using the Nelson-Siegel yield curve framework. We found that declines in the decay factor have pushed down the entire yield curve. Nonlinear impulse responses show that negative decay factor shocks mostly reduce long-dated term premium, and these shocks are associated with the size and maturity of Bank of Japan’s government bond holdings.
Keywords: decay factor, Nelson Siegel, term premium, Japan, nonlinear state space model
JEL Classification: E58, E52, C32
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