Unconventional monetary policies and the yield curve: Estimating non-affine term structure models with unspanned macro risk by factor extraction

Research output: Contribution to journalArticlepeer-review

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.
Original languageEnglish
Pages (from-to)119-152
Number of pages34
JournalReview of Asset Pricing Studies
Volume14
Issue number1
Early online date20 Jun 2023
DOIs
Publication statusPublished - 1 Mar 2024

Bibliographical note

© The Author(s) 2023.

Keywords

  • Term structure
  • Shadow rate
  • No-arbitrage restrictions
  • Macro-finance model

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