Articlebronze2015

A Regime-Switching Model of the Yield Curve at the Zero Bound

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13 citations0/0 files storedFederal Reserve Bank of San Francisco, Working Paper Series

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Monetary Policy and Economic Impact Financial Markets and Investment Strategies Stochastic processes and financial applications

Abstract

This paper presents a regime-switching model of the yield curve with two states. One is a normal state, the other is a zero-bound state that represents the case when the monetary policy target rate is at its zero lower bound for a prolonged period. The model delivers estimates of the time-varying probability of exiting the zero-bound state, and it outperforms standard three- and four-factor term structure models as well as a shadow rate model at matching short-rate expectations and the compression in yield volatility near the zero lower bound.

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References

1987Parsimonious Modeling of Yield Curves 1999Modeling Term Structures of Defaultable Bonds 2016Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound 1991Common Factors Affecting Bond Returns 2000Specification Analysis of Affine Term Structure Models 2005Bond Risk Premia 2007The U.S. Treasury yield curve: 1961 to the present 2001Term Structures of Credit Spreads with Incomplete Accounting Information

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