Abstract
We show how the Joslin, Singleton, and Zhu (2011) factor extraction approach to
estimating the Gaussian term structure model can be modified to handle the interest rate lower bound without the approximations used in other approaches. This drastically reduces the computation time and produces more robust estimates of the lower bound parameter and the shadow rate. It makes feasible the extensive specification search necessary to allow for unspanned factors as in Joslin, Priebsch, and Singleton (2014), allowing the term structure model to be used to better assess the effects of policy on the term premium and market expectations.
estimating the Gaussian term structure model can be modified to handle the interest rate lower bound without the approximations used in other approaches. This drastically reduces the computation time and produces more robust estimates of the lower bound parameter and the shadow rate. It makes feasible the extensive specification search necessary to allow for unspanned factors as in Joslin, Priebsch, and Singleton (2014), allowing the term structure model to be used to better assess the effects of policy on the term premium and market expectations.
Original language | English |
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Pages (from-to) | 119-152 |
Number of pages | 34 |
Journal | Review of Asset Pricing Studies |
Volume | 14 |
Issue number | 1 |
Early online date | 20 Jun 2023 |
DOIs | |
Publication status | Published - 1 Mar 2024 |
Bibliographical note
© The Author(s) 2023.Keywords
- Term structure
- Shadow rate
- No-arbitrage restrictions
- Macro-finance model