Are Shadow Rate Models of the Treasury Yield Curve Structurally Stable?

44 Pages Posted: 24 Aug 2020 Last revised: 25 Aug 2020

See all articles by Don H. Kim

Don H. Kim

Board of Governors of the Federal Reserve System

Marcel Priebsch

Board of Governors of the Federal Reserve System

Date Written: August, 2020

Abstract

We examine the structural stability of Gaussian shadow rate term structure models of Treasury yields over a period that includes the time during which the U.S. policy rate was at its effective lower bound. After a conceptual discussion of several potential sources of a structural break in the context of the shadow rate model, we document various pieces of evidence for structural instability based on predictive tests and Lagrange multiplier tests, as well as with separate estimations of the pre-ELB and post-ELB subsamples. In order to overcome the difficulties associated with the latent-factor nature of the model in testing for a structural break, we focus on objects that can be given intuitive interpretation, such as principal components, or that are constructed to be invariant to factor rotations.

JEL Classification: E43, E44, G12

Suggested Citation

Kim, Don H. and Priebsch, Marcel, Are Shadow Rate Models of the Treasury Yield Curve Structurally Stable? (August, 2020). FEDS Working Paper No. 2020-61, Available at SSRN: https://ssrn.com/abstract=3679203 or http://dx.doi.org/10.17016/FEDS.2020.061

Don H. Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Marcel Priebsch

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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