Staying at zero with affine processes: An application to term structure modelling

Abstract

Rue de la Banque The recent financial crises observed in the United States, the United Kingdom and the euro area have led their respective central banks to bring policy rates down to unprecedented low levels, with an associated dramatic drop of their yield curves. Short-term rates have remained at their lower bound for extended periods of time while longer-term rates have fluctuated with relatively high volatilities. This paper describes a new class of non-negative affine term structure models introduced by Monfort et al. (2017) and used to replicate these features of the yield curve. The proposed empirical analysis also suggests that ignoring interest rate risk premia implies a substantial underestimation of the length of the zero lower bound regime. Staying at zero with affine processes: an application to term structure modelling This article presents the findings of research carried out at the Banque de France. The ideas presented in this document are those of the authors and do not necessarily reflect the position of the Banque de France.

Measuring Inflation Anchoring and Uncertainty: A U.S. and Euro Area Comparison

“…Monte Carlo analyses run by Duan and Simonato () and Monfort et al. () suggest that in the case of linear but heteroscedastic models, that kind of approximation is of limited importance in practice (see also Duffee and Stanton ).…”

The Joint Dynamics of the U.S. and Euro-Area Inflation: Expectations and Time-Varying Uncertainty

“…This approach has grown increasingly common in the term structure literature and was first introduced by Kim and Orphanides (2012) in order to handle the persistence problem affecting the estimation of term structure models. Similar augmentations of state-space models can be found inKozicki and Tinsley (2006) andMonfort, Pegoraro, Renne, and Roussellet (2015).…”

Estimating Inflation Risk Premia Using Inflation‐linked Bonds: A Review

“…Recently, however, Monfort et al . () propose an affine term structure model which accommodates current challenges and provides closed‐form pricing formulas. More specifically, their model includes autoregressive gamma‐zero processes which are consistent with non‐negative yields and compatible with a short‐term rate that stays at the zero lower bound.…”