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Are Shadow Rate Models of the Treasury Yield Curve Structurally Stable?

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  • Kim, Don H.
  • Priebsch, Marcel A.

Abstract

We examine the structural stability of Gaussian shadow rate term structure models in a sample of Treasury yields that includes the “effective lower bound” (ELB) period from 2008 to 2015. After highlighting the challenges of testing for structural breaks in a latent-factor model, we proceed to document various pieces of empirical evidence for a structural break. As one of several practical implications, the expected policy rate paths during ELB years are notably shallower in our model that accommodates a structural break compared with a model that imposes structurally stability.

Suggested Citation

  • Kim, Don H. & Priebsch, Marcel A., 2024. "Are Shadow Rate Models of the Treasury Yield Curve Structurally Stable?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 59(7), pages 3500-3530, November.
    • Handle: RePEc:cup:jfinqa:v:59:y:2024:i:7:p:3500-3530_15
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