Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 20522-02-03
Number: 22-011/III
Author-Name: Daan Opschoor
Author-Workplace-Name: Erasmus University Rotterdam
Author-Name: Michel van der Wel 
Author-Workplace-Name: Erasmus University Rotterdam
Title: A Smooth Shadow-Rate Dynamic Nelson-Siegel Model for Yields at the Zero Lower Bound
Abstract: We propose a smooth shadow-rate version of the dynamic Nelson-Siegel (DNS) model to analyze the term structure of interest rates during the recent zero lower bound (ZLB) period. By relaxing the no-arbitrage restriction, our shadow-rate model becomes highly tractable with a closed-form yield curve expression. The model easily permits the implementation of readily available DNS extensions such as time-varying loadings, integration of macroeconomic variables and time-varying volatility. Using U.S. Treasury data, we provide clear evidence of a smooth tran- sition of the yields entering and leaving the ZLB state. Moreover, we show that the smooth shadow-rate DNS model dominates the baseline DNS model in terms of fitting and forecasting the yield curve, while being competitive with a shadow-rate affine term structure model.
Classification-JEL: E43, E47, C53, C58, G12
Keywords: Yield curve, zero lower bound, shadow-rate model, Nelson-Siegel curve
File-Url: https://papers.tinbergen.nl/22011.pdf
File-Format: application/pdf
File-Size: 3,902,538 bytes
Handle: RePEc:tin:wpaper:20220011