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The Use of the Black Model of Interest Rates as Options for Monitoring the JGB Market Expectations

Author

Listed:
  • Yoichi Ueno

    (Bank of Japan)

  • Naohiko Baba

    (Bank of Japan)

  • Yuji Sakurai

    (University of Tokyo)

Abstract

This paper analyzes the Japanese government bond (JGB) yield curve using the Black-Gorovoi-Linetsky (BGL) model of interest rates as options with a view to monitoring the JGB market expectations about the Bank of Japan's (BOJ) zero interest rate policy (ZIRP). Main findings are as follows. First, overall fitting performance of the BGL model is much better than that of the original Vasicek model in our sample period from the start of the quantitative monetary easing policy on March 19, 2001 through the end of the ZIRP on July 14, 2006. Second, the shadow interest rate is estimated to be negative throughout the period and rise toward zero quite recently. Third, the first hitting time until the negative shadow interest rate first hits zero shows a very good performance in predicting the ending time of the ZIRP with an error of only about one month. Fourth, the estimated probability density function of the first hitting time shows that the JGB market expectations rapidly converge to the mode value as the ending time of the ZIRP approaches.

Suggested Citation

  • Yoichi Ueno & Naohiko Baba & Yuji Sakurai, 2006. "The Use of the Black Model of Interest Rates as Options for Monitoring the JGB Market Expectations," Bank of Japan Working Paper Series 06-E-15, Bank of Japan.
    • Handle: RePEc:boj:bojwps:06-e-15
    as

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    References listed on IDEAS

    as
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    2. Ben S. Bernanke & Vincent R. Reinhart & Brian P. Sack, 2004. "Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 35(2), pages 1-100.
    3. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    5. Nobuyuki Oda & Kazuo Ueda, 2007. "The Effects Of The Bank Of Japan'S Zero Interest Rate Commitment And Quantitative Monetary Easing On The Yield Curve: A Macro‐Finance Approach," The Japanese Economic Review, Japanese Economic Association, vol. 58(3), pages 303-328, September.
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    8. Baba, Naohiko & Nishioka, Shinichi & Oda, Nobuyuki & Shirakawa, Masaaki & Ueda, Kazuo & Ugai, Hiroshi, 2005. "Japan's Deflation, Problems in the Financial System, and Monetary Policy," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 23(1), pages 47-111, February.
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    More about this item

    Keywords

    Term Structure of Interest Rates; Zero Lower Bound; Options Approach; Shadow Interest Rate; First Hitting Time;
    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
    • 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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