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Estimating Term Premia at the Zero Bound

: An Analysis of Japanese, US, and UK Yields

May 8, 2013
Hibiki Ichiue*1
Yoichi Ueno*2

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Abstract

This paper estimates an affine term structure model (ATSM) and a shadow rate model (SRM) using Japanese, US, and UK data until March 2013. These models produce very different results, which are attributable to the ATSM's neglect of the zero lower bound (ZLB). The 10-year term premium estimated by the ATSM occasionally deviates from that estimated by the SRM by around 2 percentage points, and the deviation has recently widened in the US and the UK. The ATSM consistently overestimates the long-run level of the short rate, which appears to contribute to the tendency to underestimate the term premium.

JEL Classifications
E43; E52; G12

Keywords
Affine term structure model; Shadow rate model; Zero lower bound; Term premium; Monetary policy

We are grateful for helpful discussions with and comments from the staff of the Bank of Japan, in particular, Kentaro Kikuchi. The views expressed here are ours alone and do not necessarily reflect those of the Bank of Japan.

  •   *1 Monetary Affairs Department
    E-mail : hibiki.ichiue@boj.or.jp
  •   *2 Monetary Affairs Department
    E-mail : youichi.ueno@boj.or.jp

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