Nelson-Siegel Decay Factor and Term Premia in a Low Interest Rate Environment

28 Pages Posted: 17 Mar 2020 Last revised: 28 Dec 2020

See all articles by Junko Koeda

Junko Koeda

Ministry of Finance, Japan; Waseda University - School of Political Science and Economics

Atsushi Sekine

Graduate School of Social Sciences, Chiba 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. 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

Suggested Citation

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

Junko Koeda (Contact Author)

Ministry of Finance, Japan ( email )

3-1-1 Kasumigaseki
Chiyoda-ku
Tokyo, 100-8940
Japan
1008940 (Fax)

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

Graduate School of Social Sciences, Chiba University ( email )

1-33, Yayoi-cho
Inage-ku
Chiba-shi, Chiba, 263-8522
Japan

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