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Term structure models and the zero bound: An empirical investigation of Japanese yields

2012; Elsevier BV; Volume: 170; Issue: 1 Linguagem: Inglês

10.1016/j.jeconom.2011.12.005

1872-6895

Don H. Kim, Kenneth J. Singleton,

Credit Risk and Financial Regulations

When Japanese short-term bond yields were near their zero bound, yields on long-term bonds showed substantial fluctuation, and there was a strong positive relationship between the level of interest rates and yield volatilities/risk premiums. We explore whether several families of dynamic term structure models that enforce a zero lower bound on short rates imply conditional distributions of Japanese bond yields consistent with these patterns. Multi-factor “shadow-rate” and quadratic-Gaussian models, evaluated at their maximum likelihood estimates, capture many features of the data. Furthermore, model-implied risk premiums track realized excess returns during extended periods of near-zero short rates. In contrast, the conditional distributions implied by non-negative affine models do not match their sample counterparts, and standard Gaussian affine models generate implausibly large negative risk premiums.