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A model of the euro-area yield curve with discrete policy rates

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  • Renne Jean-Paul

    (University of Lausanne, Faculty of Business and Economics (HEC), CH1015 Lausanne Switzerland)

Abstract

This paper presents a no-arbitrage yield-curve model that explicitly incorporates the central-bank policy rate. This model is consistent with the existence of a lower bound for nominal interest rates, which makes it particularly relevant in the current context of extremely low interest rates. Changes in the policy rates depend on the monetary-policy phase, that can be either in an easing, status quo or tightening mode. The estimation of the model, based on daily euro-area yield data, reveals the strong influence of the monetary-policy phases on the shape of the yield curve. This relationship can, in turn, be exploited to estimate the probabilities of being in the different monetary-policy phases. The model is also used to compute term premiums, that are the parts of the yields reflecting the aversion of investors to interest rate risk. The results point to the existence of statistically significant premiums for many dates, even for short horizons.

Suggested Citation

  • Renne Jean-Paul, 2017. "A model of the euro-area yield curve with discrete policy rates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 21(1), pages 99-116, February.
    • Handle: RePEc:bpj:sndecm:v:21:y:2017:i:1:p:99-116:n:1
    DOI: 10.1515/snde-2016-0043
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    4. Jean Barthélemy & Magali Marx, 2012. "Generalizing the Taylor Principle: New Comment," SciencePo Working papers hal-03461113, HAL.
    5. Jean-Sébastien Fontaine, 2012. "Estimating the Policy Rule from Money Market Rates when Target Rate Changes Are Lumpy," Staff Working Papers 12-41, Bank of Canada.
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    7. Marcello Pericoli & Marco Taboga, 2015. "Understanding policy rates at the zero lower bound: insights from a Bayesian shadow rate model," Temi di discussione (Economic working papers) 1023, Bank of Italy, Economic Research and International Relations Area.
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    More about this item

    Keywords

    affine term-structure models; zero lower bound; regime switching models;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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